College student loan debt has become a central focus of students and policymakers in the United States. Over the past ten years, the volume of outstanding college student loan debt has tripled, reaching more than $1 trillion and raising concerns for both students and policymakers. At the same time, enrollments in for-profit colleges spiked, rising from about 650,000 in 2000 to close to 2.5 million in 2010. Increased scrutiny and regulation of the for-profit sector has contributed to declining enrollment in recent years, but concerns remain over the high debt burdens and default rates of for-profit students.

Borrowing behavior across sectors and over time

In a Brown Center report we released today, we explore the trends in students’ borrowing across sectors and examine how they have changed over time. Overall, the patterns of for-profit student borrowing look most similar to private nonprofit student borrowing. Relative to students in the public sector, for-profit and private nonprofit students are much more likely to borrow to finance their higher education, they borrow larger amounts of money, and also supplement federal borrowing with borrowing from nonfederal sources, which tend to have less-favorable terms.

Figure A displays the trend in the percentage of students who borrow (from any source) from 1996 to 2012. While the relative position of schools in this trend stays constant, and all schools experience an overall positive upward trend in the percentage of students borrowing, the for-profit sector experienced a steeper initial climb followed by a sharp decline in recent years. Between 1996 and 2008, the for-profit sector experienced a 30 percentage point increase in the proportion of students borrowing. But between 2008 and 2012, for-profit borrowing dipped—dropping from its peak of 87 percent back to just under its 2004 level of 73 percent.

Figure A. Percentage of Students Borrowing

What explains student borrowing?

1. Academics and demographics

There are some obvious differences across sectors in the credentials that students seek. For-profit students are more likely than students in other sectors to be enrolled in certificate or associate’s degree programs (59 percent). Only about 40 percent of for-profit students are enrolled in bachelor’s degree programs, compared to roughly 90 percent of students in 4-year public and private nonprofits institutions.

Although for-profit students’ borrowing patterns are similar to private nonprofit students’, their demographics are a stark contrast. For-profit students are demographically most similar to public two-year students, but even between these two sectors, many important differences remain. For-profits have the highest proportion of female and minority students, they come from families with the lowest levels of parental education, are the most likely to be single parents, and have the highest average number of dependents among the sectors.

2. Financial resources and employment

Given the demographic composition of the student body, it should come as no surprise that for-profit students are most similar to, but in many ways still less affluent than, public two-year students who pay much lower costs for their higher education. For-profit students have the lowest average annual household income and are closest, on average, to the poverty line. Although the proportions of students who work are similar across sectors, for-profit students are the most likely to work full-time and log the most hours per week. For-profit and public two-year students are also most likely to have jobs off campus, which may increase commuting times and reduce campus integration.

3. Cost of education

Private nonprofits have average yearly gross tuition and fees totaling over $21,000—more than $11,000 higher than for-profits—while for-profit institutions have much higher average tuition and fees than public sector institutions. Compared to students at public two-year colleges, average gross tuition and fees of for-profit students are nearly seven times higher.

What really sets for-profit students apart, though, is the amount and composition of grant aid they receive. For-profit students have higher average levels of federal grants than all other sectors—due to having the highest financial need among all student bodies and their high rate of application for aid. Yet, they have far lower levels of other types of grant aid, particularly in the form of aid from the college itself. While institutions in the private nonprofit sector appear to be trying to make tuition increases less painful for their students through the generous provision of institutional aid, there is no evidence that for-profits have made any significant effort, which leaves a gap in resources that has generally been filled by student loans.

Unexplained borrowing

We decompose the difference in borrowing rates between for-profit and public two-year colleges into explained and unexplained variation. Of a total difference of 63 percent, the observable factors described above explain about 38 percent of the differential. The relatively high for-profit cost is by far the largest predictor of this explained variation, implying that for-profit student borrowing would be lower if costs were more similar to those in public community college. Observable demographics, academics, location, and even student resources contribute much less to differences in borrowing between sectors when compared to the net costs of attendance. In addition, we find that our variables can explain roughly half of the difference in loan amounts between the for-profit and public two-year sector.

Several factors may play a role in accounting for the unexplained borrowing variation between sectors.

First, financially independent students in for-profit colleges may have unmeasured need or less access to other types of non-loan aid relative to students in other sectors, making them more reliant on student loans. For example, they could have less money in personal savings—which is not counted in financial aid formulas for low-income students—on hand to pay for their higher education expenses.

Second, for-profit students (more than students in other sectors) may lack access to information about their educational options, college finance, or their expected labor market outcomes. For-profit students are least likely to have parents who completed college. Along with public two-year students, for-profit students appear to receive less advice about aid from family and friends and conduct less internet research about their options. This may cause them to be overly optimistic about their expected earnings. The lack of information and college-going networks on which they can rely also makes for-profit students particularly susceptible to the types of misrepresentation about aid and job market prospects that have been reported at some for-profit colleges.

If informational deficiencies are at least partly to blame for the high and unexplained student borrowing in the for-profit sector, the increased public scrutiny and investigations of the for-profit sector—beginning around 2010—may have raised student awareness or changed the behavior of institutions. These changes may be reflected in the declining enrollment and borrowing in the sector that we observe between 2008 and 2012. Furthermore, new tools and policies, like the College Scorecard and the disclosure requirements under Gainful Employment, hold promise for improving student decision-making. However, these initiatives may not be sufficient for all students to make complex college choice and financial aid decisions. More work is needed to understand how to deliver such information and whether more intensive supports are needed for some students. Scalable interventions that couple information provision with personalized student support may hold promise for students considering enrolling in for-profit institutions.

Grant Michl and Diana Quintero contributed to this post.

Authors

]]>
Thu, 23 Jun 2016 07:00:00 -0400Stephanie Riegg Cellini and Rajeev Darolia
College student loan debt has become a central focus of students and policymakers in the United States. Over the past ten years, the volume of outstanding college student loan debt has tripled, reaching more than $1 trillion and raising concerns for both students and policymakers. At the same time, enrollments in for-profit colleges spiked, rising from about 650,000 in 2000 to close to 2.5 million in 2010. Increased scrutiny and regulation of the for-profit sector has contributed to declining enrollment in recent years, but concerns remain over the high debt burdens and default rates of for-profit students.
Borrowing behavior across sectors and over time
In a Brown Center report we released today, we explore the trends in students' borrowing across sectors and examine how they have changed over time. Overall, the patterns of for-profit student borrowing look most similar to private nonprofit student borrowing. Relative to students in the public sector, for-profit and private nonprofit students are much more likely to borrow to finance their higher education, they borrow larger amounts of money, and also supplement federal borrowing with borrowing from nonfederal sources, which tend to have less-favorable terms.
Figure A displays the trend in the percentage of students who borrow (from any source) from 1996 to 2012. While the relative position of schools in this trend stays constant, and all schools experience an overall positive upward trend in the percentage of students borrowing, the for-profit sector experienced a steeper initial climb followed by a sharp decline in recent years. Between 1996 and 2008, the for-profit sector experienced a 30 percentage point increase in the proportion of students borrowing. But between 2008 and 2012, for-profit borrowing dipped—dropping from its peak of 87 percent back to just under its 2004 level of 73 percent.
Figure A. Percentage of Students Borrowing
What explains student borrowing?
1. Academics and demographics
There are some obvious differences across sectors in the credentials that students seek. For-profit students are more likely than students in other sectors to be enrolled in certificate or associate's degree programs (59 percent). Only about 40 percent of for-profit students are enrolled in bachelor's degree programs, compared to roughly 90 percent of students in 4-year public and private nonprofits institutions.
Although for-profit students' borrowing patterns are similar to private nonprofit students', their demographics are a stark contrast. For-profit students are demographically most similar to public two-year students, but even between these two sectors, many important differences remain. For-profits have the highest proportion of female and minority students, they come from families with the lowest levels of parental education, are the most likely to be single parents, and have the highest average number of dependents among the sectors.
2. Financial resources and employment
Given the demographic composition of the student body, it should come as no surprise that for-profit students are most similar to, but in many ways still less affluent than, public two-year students who pay much lower costs for their higher education. For-profit students have the lowest average annual household income and are closest, on average, to the poverty line. Although the proportions of students who work are similar across sectors, for-profit students are the most likely to work full-time and log the most hours per week. For-profit and public two-year students are also most likely to have jobs off campus, which may increase commuting times and reduce campus integration.
3. Cost of education
Private nonprofits have average yearly gross tuition and fees totaling over $21,000—more than $11,000 higher than for-profits—while for-profit institutions have much higher average tuition and fees than public sector institutions. Compared to students at ... College student loan debt has become a central focus of students and policymakers in the United States. Over the past ten years, the volume of outstanding college student loan debt has tripled, reaching more than $1 trillion and raising concerns for ...

College student loan debt has become a central focus of students and policymakers in the United States. Over the past ten years, the volume of outstanding college student loan debt has tripled, reaching more than $1 trillion and raising concerns for both students and policymakers. At the same time, enrollments in for-profit colleges spiked, rising from about 650,000 in 2000 to close to 2.5 million in 2010. Increased scrutiny and regulation of the for-profit sector has contributed to declining enrollment in recent years, but concerns remain over the high debt burdens and default rates of for-profit students.

Borrowing behavior across sectors and over time

In a Brown Center report we released today, we explore the trends in students’ borrowing across sectors and examine how they have changed over time. Overall, the patterns of for-profit student borrowing look most similar to private nonprofit student borrowing. Relative to students in the public sector, for-profit and private nonprofit students are much more likely to borrow to finance their higher education, they borrow larger amounts of money, and also supplement federal borrowing with borrowing from nonfederal sources, which tend to have less-favorable terms.

Figure A displays the trend in the percentage of students who borrow (from any source) from 1996 to 2012. While the relative position of schools in this trend stays constant, and all schools experience an overall positive upward trend in the percentage of students borrowing, the for-profit sector experienced a steeper initial climb followed by a sharp decline in recent years. Between 1996 and 2008, the for-profit sector experienced a 30 percentage point increase in the proportion of students borrowing. But between 2008 and 2012, for-profit borrowing dipped—dropping from its peak of 87 percent back to just under its 2004 level of 73 percent.

Figure A. Percentage of Students Borrowing

What explains student borrowing?

1. Academics and demographics

There are some obvious differences across sectors in the credentials that students seek. For-profit students are more likely than students in other sectors to be enrolled in certificate or associate’s degree programs (59 percent). Only about 40 percent of for-profit students are enrolled in bachelor’s degree programs, compared to roughly 90 percent of students in 4-year public and private nonprofits institutions.

Although for-profit students’ borrowing patterns are similar to private nonprofit students’, their demographics are a stark contrast. For-profit students are demographically most similar to public two-year students, but even between these two sectors, many important differences remain. For-profits have the highest proportion of female and minority students, they come from families with the lowest levels of parental education, are the most likely to be single parents, and have the highest average number of dependents among the sectors.

2. Financial resources and employment

Given the demographic composition of the student body, it should come as no surprise that for-profit students are most similar to, but in many ways still less affluent than, public two-year students who pay much lower costs for their higher education. For-profit students have the lowest average annual household income and are closest, on average, to the poverty line. Although the proportions of students who work are similar across sectors, for-profit students are the most likely to work full-time and log the most hours per week. For-profit and public two-year students are also most likely to have jobs off campus, which may increase commuting times and reduce campus integration.

3. Cost of education

Private nonprofits have average yearly gross tuition and fees totaling over $21,000—more than $11,000 higher than for-profits—while for-profit institutions have much higher average tuition and fees than public sector institutions. Compared to students at public two-year colleges, average gross tuition and fees of for-profit students are nearly seven times higher.

What really sets for-profit students apart, though, is the amount and composition of grant aid they receive. For-profit students have higher average levels of federal grants than all other sectors—due to having the highest financial need among all student bodies and their high rate of application for aid. Yet, they have far lower levels of other types of grant aid, particularly in the form of aid from the college itself. While institutions in the private nonprofit sector appear to be trying to make tuition increases less painful for their students through the generous provision of institutional aid, there is no evidence that for-profits have made any significant effort, which leaves a gap in resources that has generally been filled by student loans.

Unexplained borrowing

We decompose the difference in borrowing rates between for-profit and public two-year colleges into explained and unexplained variation. Of a total difference of 63 percent, the observable factors described above explain about 38 percent of the differential. The relatively high for-profit cost is by far the largest predictor of this explained variation, implying that for-profit student borrowing would be lower if costs were more similar to those in public community college. Observable demographics, academics, location, and even student resources contribute much less to differences in borrowing between sectors when compared to the net costs of attendance. In addition, we find that our variables can explain roughly half of the difference in loan amounts between the for-profit and public two-year sector.

Several factors may play a role in accounting for the unexplained borrowing variation between sectors.

First, financially independent students in for-profit colleges may have unmeasured need or less access to other types of non-loan aid relative to students in other sectors, making them more reliant on student loans. For example, they could have less money in personal savings—which is not counted in financial aid formulas for low-income students—on hand to pay for their higher education expenses.

Second, for-profit students (more than students in other sectors) may lack access to information about their educational options, college finance, or their expected labor market outcomes. For-profit students are least likely to have parents who completed college. Along with public two-year students, for-profit students appear to receive less advice about aid from family and friends and conduct less internet research about their options. This may cause them to be overly optimistic about their expected earnings. The lack of information and college-going networks on which they can rely also makes for-profit students particularly susceptible to the types of misrepresentation about aid and job market prospects that have been reported at some for-profit colleges.

If informational deficiencies are at least partly to blame for the high and unexplained student borrowing in the for-profit sector, the increased public scrutiny and investigations of the for-profit sector—beginning around 2010—may have raised student awareness or changed the behavior of institutions. These changes may be reflected in the declining enrollment and borrowing in the sector that we observe between 2008 and 2012. Furthermore, new tools and policies, like the College Scorecard and the disclosure requirements under Gainful Employment, hold promise for improving student decision-making. However, these initiatives may not be sufficient for all students to make complex college choice and financial aid decisions. More work is needed to understand how to deliver such information and whether more intensive supports are needed for some students. Scalable interventions that couple information provision with personalized student support may hold promise for students considering enrolling in for-profit institutions.

Authors

]]>
http://www.brookings.edu/research/opinions/2016/03/30-cbo-projections-reason-to-worry-federal-debt-wessel?rssid=debt+debate{7C0C28F9-610C-4AB6-A2D2-DB97A0936B05}http://webfeeds.brookings.edu/~/146746750/0/brookingsrss/topics/debtdebate~In-CBOs-projections-a-growing-reason-to-worry-about-the-federal-debtIn CBO's projections, a growing reason to worry about the federal debt

Convincing Americans that they should worry about the federal deficit and debt is tough, despite all those warnings about the inevitable crisis.

The federal debt, the sum total of all the government’s past borrowing, is huge by historical standards: bigger as a share of the economy than at any time in U.S. history except for World War II. Yet the U.S. Treasury still is able to borrow billions every day at very low interest rates. Investors demand less than 2% to lend to the Treasury for 10 years.

But the trajectory of the debt is worrisome for one inescapable reason: When you owe a lot of money and interest rates rise, your interest tab mounts.

Today, interest consumes a bit more than 6% of all federal outlays. But the latest Congressional Budget Office baseline projections suggest that, without new tax or spending legislation, interest will account for more than 13% of all federal outlays in 2026. That’s partly because interest rates are expected to rise from today’s very low levels; CBO expects the average yield on 10-year Treasury notes, now around 1.9%, to climb to 4.1% over the next decade. There will also be more debt on which to pay interest because the government will be borrowing each year to cover the deficit.

Of course, Congress and the president–Barack Obama or his successor–could raise taxes or cut spending. That would mean less debt and thus lower interest payments. But the latest CBO scoring of President Obama’s budget suggests that even if Congress accepts each of his tax and spending proposals, interest in 2026 still would account for 12% of federal spending.

That’s a lot of money–more than the White House projects for annually appropriated spending in 2026 by all government agencies combined outside of the Pentagon.

Of course, 10-year projections can be wrong. Interest rates could be higher or lower than CBO expects. Congress could spend more or less than expected on annual appropriations. But there remains one inexorable fiscal fact: When you owe a lot of money and interest rates climb, you’ll be spending a lot more on interest.

Convincing Americans that they should worry about the federal deficit and debt is tough, despite all those warnings about the inevitable crisis.

The federal debt, the sum total of all the government’s past borrowing, is huge by historical standards: bigger as a share of the economy than at any time in U.S. history except for World War II. Yet the U.S. Treasury still is able to borrow billions every day at very low interest rates. Investors demand less than 2% to lend to the Treasury for 10 years.

But the trajectory of the debt is worrisome for one inescapable reason: When you owe a lot of money and interest rates rise, your interest tab mounts.

Today, interest consumes a bit more than 6% of all federal outlays. But the latest Congressional Budget Office baseline projections suggest that, without new tax or spending legislation, interest will account for more than 13% of all federal outlays in 2026. That’s partly because interest rates are expected to rise from today’s very low levels; CBO expects the average yield on 10-year Treasury notes, now around 1.9%, to climb to 4.1% over the next decade. There will also be more debt on which to pay interest because the government will be borrowing each year to cover the deficit.

Of course, Congress and the president–Barack Obama or his successor–could raise taxes or cut spending. That would mean less debt and thus lower interest payments. But the latest CBO scoring of President Obama’s budget suggests that even if Congress accepts each of his tax and spending proposals, interest in 2026 still would account for 12% of federal spending.

That’s a lot of money–more than the White House projects for annually appropriated spending in 2026 by all government agencies combined outside of the Pentagon.

Of course, 10-year projections can be wrong. Interest rates could be higher or lower than CBO expects. Congress could spend more or less than expected on annual appropriations. But there remains one inexorable fiscal fact: When you owe a lot of money and interest rates climb, you’ll be spending a lot more on interest.

Authors

]]>
http://www.brookings.edu/blogs/future-development/posts/2016/03/04-eurozone-structural-policy-pinto?rssid=debt+debate{89994042-AD3D-4EE3-8DBF-E2554F4D0520}http://webfeeds.brookings.edu/~/142021004/0/brookingsrss/topics/debtdebate~Eurozone-structural-policy-Game-changer-or-game-overEurozone structural policy: Game changer, or game over?

Implement structural policy, or structural reform, and you will solve the problem of stagnant growth in the Eurozone! At least that’s the impression created by the September 2014 Geneva Report on deleveraging (see Figure 3A.3, page 31). And no one has argued the case more forcefully than European Central Bank President Mario Draghi, who took office in November 2011 when Greece was in a meltdown, Italian sovereign 10-year bond yields had crossed the psychological threshold of seven percent, and investors were concerned about the very survival of the euro.

As set out in his May 2015 speech on structural reforms, inflation and monetary policy, the goals of structural reform for Draghi are to raise potential growth by creating a climate for higher capital accumulation (increasing capital-labor ratios) and faster total factor productivity (TFP) growth; and to enhance resilience thereby minimizing output losses following adverse shocks. Further, he argues that there is no excuse for procrastination because the ECB’s accommodative monetary policy, consisting of policy interest rates at the zero lower bound (ZLB) and quantitative easing (sovereign bond quantitative easing was started in March 2015), should facilitate structural reform by increasing the payoff in terms of faster growth and investment benefits. However, there are serious problems with Draghi’s position.

First, the goals of structural reform are defined, but what is structural reform? Draghi mentions only “best practice across labor and product markets, tax policy and pensions.” Learning from the emerging market experience, structural reform is everything that is left after macroeconomic stabilization and “getting the prices right,” or foreign trade liberalization. It grew out of the recognition in the 1980s that the latter two were not enough to put countries on faster growth paths: property and creditor rights, competition policy, a good legal and regulatory framework, flexible labor markets, and credible fiscal and financial institutions were also necessary. But surely, Eurozone countries being mostly advanced economies, or developed markets, already have the necessary institutions and structural policies in place? Not quite, as I shall discuss.

Second, Draghi argues that accommodative monetary policy should facilitate structural reform by increasing the payoff to structural reform through quick wins on investment and growth. But consider the opposite angle: that excessive leverage and a debt overhang in the Eurozone have compelled an accommodative monetary policy. This is a critical point from the emerging market perspective because structural reform tends to be disruptive, involving both winners and losers, and often with large upfront costs in terms of output, which are difficult to absorb in the presence of a debt overhang.

Examples: Poland which from 1990 to 1991, suffered a cumulative 18 percent decline in gross domestic product (GDP), but which has registered positive growth ever since, and was the only country in the EU to grow in 2009; or India, which implemented far-reaching reforms after its 1991 balance-of-payments crisis, but suffered a big deterioration in its government debt dynamics before growth took off in 2003. It is hard to implement structural reform when a debt overhang is present and debt dynamics are unsustainable at normal interest rates: the difficult structural reforms Poland implemented in 1990 were facilitated by the 50 percent debt write-off it received from the Paris Club.

The Centre for Economic Policy Research report on Eurozone debt argues that monetary policy has reached its limits in the Eurozone, and that growth is anemic because of its debt overhang, which must therefore be eliminated. The report proposes several options, including securitizing a part of future tax revenues or even seigniorage to bring government debt-to-GDP levels below 95 percent of GDP. The quid pro quo would be a reform in fiscal governance and the official bailout mechanism to make the tattered so-called no bailout clause credible. However, none of the debt restructuring proposals argues for a reduction in the net present value (NPV) of outstanding debt claims, without which it is hard to see how the debt overhang can be resolved.

Third, the idea that structural reform would increase resilience and allow quick recoveries from adverse shocks raises the topic of the timing of the reform. If it is to possess a countercyclical property, it needs to be implemented in good times, as with countercyclical fiscal policy. Fiscal cushions, sound banks, strong balance sheets—these are the foundations of resilience, enabling shocks to be absorbed and permitting quick rebounds after a recession; but these need to be in place before the adverse shock hits.

This last point is reinforced by the 2003 Sapir Report (see also Aghion and Durlauf (2007)) which attributed the stop in the convergence of per capita Eurozone GDP to US levels in the mid-1970s to a competition policy that focused on incumbents as opposed to new entry. Once again, the Polish experience, which involved uncompromisingly hard budget constraints for incumbent firms and banks, is instructive. Incumbent firms were subject to the threat of bankruptcy if they could not adapt to a market economy. Together with competition from imports, this forced enterprise restructuring and asset reallocation that permanently strengthened the microeconomic foundations for growth. But as noted already, this approach had large upfront output costs and was cushioned by Poland’s debt write-down. In the Eurozone today, zero interest rates if anything serve as a blanket soft budget constraint to keep over-leveraged governments afloat.

The debt overhang in the Eurozone will have to be resolved before one can think of benefits accruing from structural reform. Such reform entails upfront costs and it is difficult to absorb these when a debt overhang is present. Besides, with potential growth having been reduced to just 1 percent in the Eurozone, it is unlikely to grow out of its debt problem even at the ZLB. Finally, there is also the thorny issue of the timing of structural reform. The growth performance bifurcation between the USA and the Eurozone has become even more pronounced after the Global Financial Crisis. The implication is clear: Good structural policies must be in place before a crisis hits. Indeed, even fiscal and financial institutions remain incomplete in the Eurozone. In these circumstances, to see structural policy as the missing piece of the growth puzzle is mere wishful thinking.

Brian Pinto was at the World Bank from 1984-2013 followed by two years as chief economist, Emerging Markets, at GLG in London. This column is based on his chapter in Boosting European Competitiveness: The Role of the CESEE Countries, Edward Elgar, forthcoming, autumn 2016. This volume captures the proceedings of a conference on the Future of the European Economy jointly sponsored by Narodowy Bank Polski and Oesterreichische National Bank in October 2015. Brian holds a PhD in Economics from the University of Pennsylvania, USA. His papers have appeared in top economic journals, and his second book, How Does My Country Grow? Economic Advice Through Story-Telling, was published by Oxford University Press in 2014.

Authors

Brian Pinto

]]>
Fri, 04 Mar 2016 09:07:00 -0500Brian Pinto
Implement structural policy, or structural reform, and you will solve the problem of stagnant growth in the Eurozone! At least that's the impression created by the September 2014 Geneva Report on deleveraging (see Figure 3A.3, page 31). And no one has argued the case more forcefully than European Central Bank President Mario Draghi, who took office in November 2011 when Greece was in a meltdown, Italian sovereign 10-year bond yields had crossed the psychological threshold of seven percent, and investors were concerned about the very survival of the euro.
As set out in his May 2015 speech on structural reforms, inflation and monetary policy, the goals of structural reform for Draghi are to raise potential growth by creating a climate for higher capital accumulation (increasing capital-labor ratios) and faster total factor productivity (TFP) growth; and to enhance resilience thereby minimizing output losses following adverse shocks. Further, he argues that there is no excuse for procrastination because the ECB's accommodative monetary policy, consisting of policy interest rates at the zero lower bound (ZLB) and quantitative easing (sovereign bond quantitative easing was started in March 2015), should facilitate structural reform by increasing the payoff in terms of faster growth and investment benefits. However, there are serious problems with Draghi's position.
First, the goals of structural reform are defined, but what is structural reform? Draghi mentions only “best practice across labor and product markets, tax policy and pensions.” Learning from the emerging market experience, structural reform is everything that is left after macroeconomic stabilization and “getting the prices right,” or foreign trade liberalization. It grew out of the recognition in the 1980s that the latter two were not enough to put countries on faster growth paths: property and creditor rights, competition policy, a good legal and regulatory framework, flexible labor markets, and credible fiscal and financial institutions were also necessary. But surely, Eurozone countries being mostly advanced economies, or developed markets, already have the necessary institutions and structural policies in place? Not quite, as I shall discuss.
Second, Draghi argues that accommodative monetary policy should facilitate structural reform by increasing the payoff to structural reform through quick wins on investment and growth. But consider the opposite angle: that excessive leverage and a debt overhang in the Eurozone have compelled an accommodative monetary policy. This is a critical point from the emerging market perspective because structural reform tends to be disruptive, involving both winners and losers, and often with large upfront costs in terms of output, which are difficult to absorb in the presence of a debt overhang.
Examples: Poland which from 1990 to 1991, suffered a cumulative 18 percent decline in gross domestic product (GDP), but which has registered positive growth ever since, and was the only country in the EU to grow in 2009; or India, which implemented far-reaching reforms after its 1991 balance-of-payments crisis, but suffered a big deterioration in its government debt dynamics before growth took off in 2003. It is hard to implement structural reform when a debt overhang is present and debt dynamics are unsustainable at normal interest rates: the difficult structural reforms Poland implemented in 1990 were facilitated by the 50 percent debt write-off it received from the Paris Club.
The Centre for Economic Policy Research report on Eurozone debt argues that monetary policy has reached its limits in the Eurozone, and that growth is anemic because of its debt overhang, which must therefore be eliminated. The report proposes several options, including securitizing a part of future tax revenues or even seigniorage to bring government debt-to-GDP levels below 95 percent of GDP. The quid pro quo would be a ...
Implement structural policy, or structural reform, and you will solve the problem of stagnant growth in the Eurozone! At least that's the impression created by the September 2014 Geneva Report on deleveraging (see Figure 3A.

Implement structural policy, or structural reform, and you will solve the problem of stagnant growth in the Eurozone! At least that’s the impression created by the September 2014 Geneva Report on deleveraging (see Figure 3A.3, page 31). And no one has argued the case more forcefully than European Central Bank President Mario Draghi, who took office in November 2011 when Greece was in a meltdown, Italian sovereign 10-year bond yields had crossed the psychological threshold of seven percent, and investors were concerned about the very survival of the euro.

As set out in his May 2015 speech on structural reforms, inflation and monetary policy, the goals of structural reform for Draghi are to raise potential growth by creating a climate for higher capital accumulation (increasing capital-labor ratios) and faster total factor productivity (TFP) growth; and to enhance resilience thereby minimizing output losses following adverse shocks. Further, he argues that there is no excuse for procrastination because the ECB’s accommodative monetary policy, consisting of policy interest rates at the zero lower bound (ZLB) and quantitative easing (sovereign bond quantitative easing was started in March 2015), should facilitate structural reform by increasing the payoff in terms of faster growth and investment benefits. However, there are serious problems with Draghi’s position.

First, the goals of structural reform are defined, but what is structural reform? Draghi mentions only “best practice across labor and product markets, tax policy and pensions.” Learning from the emerging market experience, structural reform is everything that is left after macroeconomic stabilization and “getting the prices right,” or foreign trade liberalization. It grew out of the recognition in the 1980s that the latter two were not enough to put countries on faster growth paths: property and creditor rights, competition policy, a good legal and regulatory framework, flexible labor markets, and credible fiscal and financial institutions were also necessary. But surely, Eurozone countries being mostly advanced economies, or developed markets, already have the necessary institutions and structural policies in place? Not quite, as I shall discuss.

Second, Draghi argues that accommodative monetary policy should facilitate structural reform by increasing the payoff to structural reform through quick wins on investment and growth. But consider the opposite angle: that excessive leverage and a debt overhang in the Eurozone have compelled an accommodative monetary policy. This is a critical point from the emerging market perspective because structural reform tends to be disruptive, involving both winners and losers, and often with large upfront costs in terms of output, which are difficult to absorb in the presence of a debt overhang.

Examples: Poland which from 1990 to 1991, suffered a cumulative 18 percent decline in gross domestic product (GDP), but which has registered positive growth ever since, and was the only country in the EU to grow in 2009; or India, which implemented far-reaching reforms after its 1991 balance-of-payments crisis, but suffered a big deterioration in its government debt dynamics before growth took off in 2003. It is hard to implement structural reform when a debt overhang is present and debt dynamics are unsustainable at normal interest rates: the difficult structural reforms Poland implemented in 1990 were facilitated by the 50 percent debt write-off it received from the Paris Club.

The Centre for Economic Policy Research report on Eurozone debt argues that monetary policy has reached its limits in the Eurozone, and that growth is anemic because of its debt overhang, which must therefore be eliminated. The report proposes several options, including securitizing a part of future tax revenues or even seigniorage to bring government debt-to-GDP levels below 95 percent of GDP. The quid pro quo would be a reform in fiscal governance and the official bailout mechanism to make the tattered so-called no bailout clause credible. However, none of the debt restructuring proposals argues for a reduction in the net present value (NPV) of outstanding debt claims, without which it is hard to see how the debt overhang can be resolved.

Third, the idea that structural reform would increase resilience and allow quick recoveries from adverse shocks raises the topic of the timing of the reform. If it is to possess a countercyclical property, it needs to be implemented in good times, as with countercyclical fiscal policy. Fiscal cushions, sound banks, strong balance sheets—these are the foundations of resilience, enabling shocks to be absorbed and permitting quick rebounds after a recession; but these need to be in place before the adverse shock hits.

This last point is reinforced by the 2003 Sapir Report (see also Aghion and Durlauf (2007)) which attributed the stop in the convergence of per capita Eurozone GDP to US levels in the mid-1970s to a competition policy that focused on incumbents as opposed to new entry. Once again, the Polish experience, which involved uncompromisingly hard budget constraints for incumbent firms and banks, is instructive. Incumbent firms were subject to the threat of bankruptcy if they could not adapt to a market economy. Together with competition from imports, this forced enterprise restructuring and asset reallocation that permanently strengthened the microeconomic foundations for growth. But as noted already, this approach had large upfront output costs and was cushioned by Poland’s debt write-down. In the Eurozone today, zero interest rates if anything serve as a blanket soft budget constraint to keep over-leveraged governments afloat.

The debt overhang in the Eurozone will have to be resolved before one can think of benefits accruing from structural reform. Such reform entails upfront costs and it is difficult to absorb these when a debt overhang is present. Besides, with potential growth having been reduced to just 1 percent in the Eurozone, it is unlikely to grow out of its debt problem even at the ZLB. Finally, there is also the thorny issue of the timing of structural reform. The growth performance bifurcation between the USA and the Eurozone has become even more pronounced after the Global Financial Crisis. The implication is clear: Good structural policies must be in place before a crisis hits. Indeed, even fiscal and financial institutions remain incomplete in the Eurozone. In these circumstances, to see structural policy as the missing piece of the growth puzzle is mere wishful thinking.

Brian Pinto was at the World Bank from 1984-2013 followed by two years as chief economist, Emerging Markets, at GLG in London. This column is based on his chapter in Boosting European Competitiveness: The Role of the CESEE Countries, Edward Elgar, forthcoming, autumn 2016. This volume captures the proceedings of a conference on the Future of the European Economy jointly sponsored by Narodowy Bank Polski and Oesterreichische National Bank in October 2015. Brian holds a PhD in Economics from the University of Pennsylvania, USA. His papers have appeared in top economic journals, and his second book, How Does My Country Grow? Economic Advice Through Story-Telling, was published by Oxford University Press in 2014.

Authors

Brian Pinto

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http://www.brookings.edu/blogs/fixgov/posts/2016/02/05-debt-ceiling-blame-game-wallach?rssid=debt+debate{BDC333DE-56B8-4275-84C8-ED877017004F}http://webfeeds.brookings.edu/~/136294997/0/brookingsrss/topics/debtdebate~Offseason-moves-in-the-debt-ceiling-blame-gameOffseason moves in the debt ceiling blame game

Long ago, back in October 2015, as John Boehner was finding his way out the door to the cheers of the right wing of his conference, he shepherded through a budget deal that included a suspension of the debt ceiling through March 2017. That was the right thing to do for both his country and his party: it meant that the new Speaker could begin his tenure without having to fight a losing and possibly disastrous battle, and it meant that 2016 would bring a welcome respite from our strange national debt ceiling bloodsport, letting both parties focus their energies on our presidential political bloodsport instead.

But like a sports team front office, signing free agents and making trades to improve their positioning in the offseason, Representatives Jeb Hensarling (R-TX) and Sean Duffy (R-WI) have done a bit of maneuvering while the nation’s attention has turned to the presidential race. The Chairmen of the House Financial Services Committee and its Oversight subcommittee, respectively, they released a non-committee-approved staff report this week, “The Obama Administration’s Debt Ceiling Subterfuge: Subpoenaed Documents Reveal Treasury Misled Public in Attempt to ‘Maximize Pressure on Congress.”

The headline finding is that the Treasury Department and Federal Reserve Bank of New York (FRBNY) have been engaging in coordinated contingency planning for a cash flow emergency caused by a failure to raise the debt ceiling since March 2011. Hensarling and Duffy aren’t saying that this planning was inappropriate—far from it, actually, they think it is clear that the Treasury ought to be ready to prioritize debt service payments should we run hard up against the debt ceiling. Rather, their complaint is that the Treasury has obfuscated and misled Republican congressional leaders about the state of these efforts so as to be able to claim that utter disaster would ensue if the debt ceiling goes unraised and the Treasury runs through all of its operating cash.

This is far from a petty complaint. I have argued that in any debt ceiling impasse, close and honest communication between congressional leaders and the administration would be crucial in the effort to transform the incident from a blow-up to a hiccup. To the extent that Treasury misdirection has eroded its credibility in the eyes of congressional leaders, it may have created an obstacle to safely working through debt ceiling impasses, and for that it deserves some real blame. All the more so if, as the document says, it not only failed to be forthcoming itself but also actively suppressed communication between the FRBNY and Congress.

But, supposing the report’s charges are correct, the implications are nevertheless rather ambiguous. Defenders of using the debt ceiling as a bludgeon in inter-branch budgetary hardball, like the Mercatus Center’s Veronique de Rugy, assert that the upshot of Hensarling and Duffy’s report is crystal clear: Republicans should feel free to take a hard stand on the debt ceiling without any fear that doing so will blow up the global financial system. If the government has to seriously tighten its belt in such a situation, all the better.

That is a serious over-reading. Just because the Treasury has done some planning that it hasn’t allowed Congress to fully observe, that doesn’t mean that it is perfectly prepared to deal with the exigencies that would arise should we run hard up against the debt ceiling. Saying so is like assuming that North Korea must have a functional nuclear triad because it has prevented outside inspectors from overseeing its weapons programs.

As I have previously noted, this debate about the Treasury’s ability to prioritize features a strange inversion of the usual roles for Democrats and Republicans arguing about the federal bureaucracy. Democrats, usually defenders of administrative competence, aver that both our civil servants and the technology available to them are woefully inadequate to ensure any smooth response to hitting the debt ceiling and warn that even debt service is far from a sure thing. Republicans, usually quick to scoff at the idea of Washington bureaucrats doing their jobs efficiently and effectively, apparently have supreme confidence that the Treasury Department would perform flawlessly in such an unprecedented situation and dismiss any worries about tragic malfunctions.

The stakes of this positioning are straightforward enough: the less we think debt ceiling hardball is likely to bring true financial or constitutional disaster, the more acceptable it is as a tool for forcing spending cuts a la summer 2011. This same dynamic is at work when Republicans try to take debt default completely off the table through the Default Prevention Act, which passed the House but has not yet been taken up by the Senate. Arguably, the Republicans’ offseason moves marginally improve Congress’s negotiating position by making it slightly more embarrassing for the administration to invoke the specter of apocalypse in rejecting debt ceiling negotiations.

But at the end of the day, it’s hard to imagine that tweaking either the law, if the Default Prevention Act should pass, or the public’s understanding of Treasury’s capabilities will really turn the debt ceiling into a winning device for fiscal restraint. The uncertainty around what would happen if the ceiling goes unraised remains too high, even if there are some glimmers of hope that things wouldn’t be a total disaster. And that means that the president’s hand is just too strong in debt ceiling confrontations to make them anything other than moments of empty speechifying for Congress.

We now return you to your regularly scheduled 2016 politicking…

Authors

]]>
Fri, 05 Feb 2016 10:00:00 -0500Philip A. Wallach
Long ago, back in October 2015, as John Boehner was finding his way out the door to the cheers of the right wing of his conference, he shepherded through a budget deal that included a suspension of the debt ceiling through March 2017. That was the right thing to do for both his country and his party: it meant that the new Speaker could begin his tenure without having to fight a losing and possibly disastrous battle, and it meant that 2016 would bring a welcome respite from our strange national debt ceiling bloodsport, letting both parties focus their energies on our presidential political bloodsport instead.
But like a sports team front office, signing free agents and making trades to improve their positioning in the offseason, Representatives Jeb Hensarling (R-TX) and Sean Duffy (R-WI) have done a bit of maneuvering while the nation's attention has turned to the presidential race. The Chairmen of the House Financial Services Committee and its Oversight subcommittee, respectively, they released a non-committee-approved staff report this week, “The Obama Administration's Debt Ceiling Subterfuge: Subpoenaed Documents Reveal Treasury Misled Public in Attempt to 'Maximize Pressure on Congress.”
The headline finding is that the Treasury Department and Federal Reserve Bank of New York (FRBNY) have been engaging in coordinated contingency planning for a cash flow emergency caused by a failure to raise the debt ceiling since March 2011. Hensarling and Duffy aren't saying that this planning was inappropriate—far from it, actually, they think it is clear that the Treasury ought to be ready to prioritize debt service payments should we run hard up against the debt ceiling. Rather, their complaint is that the Treasury has obfuscated and misled Republican congressional leaders about the state of these efforts so as to be able to claim that utter disaster would ensue if the debt ceiling goes unraised and the Treasury runs through all of its operating cash.
This is far from a petty complaint. I have argued that in any debt ceiling impasse, close and honest communication between congressional leaders and the administration would be crucial in the effort to transform the incident from a blow-up to a hiccup. To the extent that Treasury misdirection has eroded its credibility in the eyes of congressional leaders, it may have created an obstacle to safely working through debt ceiling impasses, and for that it deserves some real blame. All the more so if, as the document says, it not only failed to be forthcoming itself but also actively suppressed communication between the FRBNY and Congress.
But, supposing the report's charges are correct, the implications are nevertheless rather ambiguous. Defenders of using the debt ceiling as a bludgeon in inter-branch budgetary hardball, like the Mercatus Center's Veronique de Rugy, assert that the upshot of Hensarling and Duffy's report is crystal clear: Republicans should feel free to take a hard stand on the debt ceiling without any fear that doing so will blow up the global financial system. If the government has to seriously tighten its belt in such a situation, all the better.
That is a serious over-reading. Just because the Treasury has done some planning that it hasn't allowed Congress to fully observe, that doesn't mean that it is perfectly prepared to deal with the exigencies that would arise should we run hard up against the debt ceiling. Saying so is like assuming that North Korea must have a functional nuclear triad because it has prevented outside inspectors from overseeing its weapons programs.
As I have previously noted, this debate about the Treasury's ability to prioritize features a strange inversion of the usual roles for Democrats and Republicans arguing about the federal bureaucracy. Democrats, usually defenders of administrative competence, aver that both our civil servants and the technology available to them are woefully inadequate to ensure any ...
Long ago, back in October 2015, as John Boehner was finding his way out the door to the cheers of the right wing of his conference, he shepherded through a budget deal that included a suspension of the debt ceiling through March 2017.

Long ago, back in October 2015, as John Boehner was finding his way out the door to the cheers of the right wing of his conference, he shepherded through a budget deal that included a suspension of the debt ceiling through March 2017. That was the right thing to do for both his country and his party: it meant that the new Speaker could begin his tenure without having to fight a losing and possibly disastrous battle, and it meant that 2016 would bring a welcome respite from our strange national debt ceiling bloodsport, letting both parties focus their energies on our presidential political bloodsport instead.

But like a sports team front office, signing free agents and making trades to improve their positioning in the offseason, Representatives Jeb Hensarling (R-TX) and Sean Duffy (R-WI) have done a bit of maneuvering while the nation’s attention has turned to the presidential race. The Chairmen of the House Financial Services Committee and its Oversight subcommittee, respectively, they released a non-committee-approved staff report this week, “The Obama Administration’s Debt Ceiling Subterfuge: Subpoenaed Documents Reveal Treasury Misled Public in Attempt to ‘Maximize Pressure on Congress.”

The headline finding is that the Treasury Department and Federal Reserve Bank of New York (FRBNY) have been engaging in coordinated contingency planning for a cash flow emergency caused by a failure to raise the debt ceiling since March 2011. Hensarling and Duffy aren’t saying that this planning was inappropriate—far from it, actually, they think it is clear that the Treasury ought to be ready to prioritize debt service payments should we run hard up against the debt ceiling. Rather, their complaint is that the Treasury has obfuscated and misled Republican congressional leaders about the state of these efforts so as to be able to claim that utter disaster would ensue if the debt ceiling goes unraised and the Treasury runs through all of its operating cash.

This is far from a petty complaint. I have argued that in any debt ceiling impasse, close and honest communication between congressional leaders and the administration would be crucial in the effort to transform the incident from a blow-up to a hiccup. To the extent that Treasury misdirection has eroded its credibility in the eyes of congressional leaders, it may have created an obstacle to safely working through debt ceiling impasses, and for that it deserves some real blame. All the more so if, as the document says, it not only failed to be forthcoming itself but also actively suppressed communication between the FRBNY and Congress.

But, supposing the report’s charges are correct, the implications are nevertheless rather ambiguous. Defenders of using the debt ceiling as a bludgeon in inter-branch budgetary hardball, like the Mercatus Center’s Veronique de Rugy, assert that the upshot of Hensarling and Duffy’s report is crystal clear: Republicans should feel free to take a hard stand on the debt ceiling without any fear that doing so will blow up the global financial system. If the government has to seriously tighten its belt in such a situation, all the better.

That is a serious over-reading. Just because the Treasury has done some planning that it hasn’t allowed Congress to fully observe, that doesn’t mean that it is perfectly prepared to deal with the exigencies that would arise should we run hard up against the debt ceiling. Saying so is like assuming that North Korea must have a functional nuclear triad because it has prevented outside inspectors from overseeing its weapons programs.

As I have previously noted, this debate about the Treasury’s ability to prioritize features a strange inversion of the usual roles for Democrats and Republicans arguing about the federal bureaucracy. Democrats, usually defenders of administrative competence, aver that both our civil servants and the technology available to them are woefully inadequate to ensure any smooth response to hitting the debt ceiling and warn that even debt service is far from a sure thing. Republicans, usually quick to scoff at the idea of Washington bureaucrats doing their jobs efficiently and effectively, apparently have supreme confidence that the Treasury Department would perform flawlessly in such an unprecedented situation and dismiss any worries about tragic malfunctions.

The stakes of this positioning are straightforward enough: the less we think debt ceiling hardball is likely to bring true financial or constitutional disaster, the more acceptable it is as a tool for forcing spending cuts a la summer 2011. This same dynamic is at work when Republicans try to take debt default completely off the table through the Default Prevention Act, which passed the House but has not yet been taken up by the Senate. Arguably, the Republicans’ offseason moves marginally improve Congress’s negotiating position by making it slightly more embarrassing for the administration to invoke the specter of apocalypse in rejecting debt ceiling negotiations.

But at the end of the day, it’s hard to imagine that tweaking either the law, if the Default Prevention Act should pass, or the public’s understanding of Treasury’s capabilities will really turn the debt ceiling into a winning device for fiscal restraint. The uncertainty around what would happen if the ceiling goes unraised remains too high, even if there are some glimmers of hope that things wouldn’t be a total disaster. And that means that the president’s hand is just too strong in debt ceiling confrontations to make them anything other than moments of empty speechifying for Congress.

We now return you to your regularly scheduled 2016 politicking…

Authors

]]>
http://www.brookings.edu/research/papers/2015/11/campaign-2016-presidential-candidates-national-debt?rssid=debt+debate{00587C1F-5C79-46E6-A3B6-9A54E54110D8}http://webfeeds.brookings.edu/~/123896575/0/brookingsrss/topics/debtdebate~Why-the-federal-debt-must-be-a-top-priority-for-the-presidential-candidatesWhy the federal debt must be a top priority for the 2016 presidential candidates

SUMMARY:One issue above all others that remains a problem and should transcend partisan agendas is the unsustainable projected growth of the federal debt, write Bob Bixby of the Concord Coalition and Maya MacGuineas of the Committee for a Responsible Federal Budget. They warn that candidates “may be tempted to conclude that our fiscal problems are behind us. That would be a mistake,” given that, over the coming decade, the debt is on track to grow by more than $7 trillion and resume a long-term unsustainable path – which is “a matter of arithmetic, not ideology.” Bixby and MacGuineas argue that reducing the long-term debt is in fact an economic growth plan because government debt crowds out productive investments in people, machinery, technology, and new ventures, resulting in fewer job opportunities, lower wages, and slower GDP growth. Economic growth is crucial but alone can’t solve the debt problem, and candidates must be willing to explain the issues to voters: the real cause of projected deficit growth and rising debt is a built-in mismatch between projected revenues and popular benefit programs that operate on autopilot, especially Medicare, Medicaid, Social Security, and interest payment on the debt. They present a list of things candidates should pledge in their first budgets, with a focus on Social Security, health care, and taxes.

“In the past, we have seen some elections in which the candidates competed to be fiscally responsible, and other elections in which they pandered and ran from the issue. This is a critical moment for the United States and the debt; the next president, whoever he or she is, will have to face a number of looming fiscal issues from the depletion of the Social Security disability fund, to a likely increase in interest rates, to the ongoing extremely expensive retirement of the baby boom generation. Growing the economy is one of the themes of this campaign and yet it cannot happen without a sustainable fiscal plan. Citizens are willing to be part of sensible reforms that would help control the debt and grow the economy, but they will need presidential candidates—and ultimately a president—who is willing to honestly talk about and tackle the issue,” they conclude.

Downloads

Authors

Robert L. Bixby

Maya MacGuineas

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Wed, 18 Nov 2015 00:00:00 -0500Robert L. Bixby and Maya MacGuineas
SUMMARY:
One issue above all others that remains a problem and should transcend partisan agendas is the unsustainable projected growth of the federal debt, write Bob Bixby of the Concord Coalition and Maya MacGuineas of the Committee for a Responsible Federal Budget. They warn that candidates “may be tempted to conclude that our fiscal problems are behind us. That would be a mistake,” given that, over the coming decade, the debt is on track to grow by more than $7 trillion and resume a long-term unsustainable path – which is “a matter of arithmetic, not ideology.” Bixby and MacGuineas argue that reducing the long-term debt is in fact an economic growth plan because government debt crowds out productive investments in people, machinery, technology, and new ventures, resulting in fewer job opportunities, lower wages, and slower GDP growth. Economic growth is crucial but alone can’t solve the debt problem, and candidates must be willing to explain the issues to voters: the real cause of projected deficit growth and rising debt is a built-in mismatch between projected revenues and popular benefit programs that operate on autopilot, especially Medicare, Medicaid, Social Security, and interest payment on the debt. They present a list of things candidates should pledge in their first budgets, with a focus on Social Security, health care, and taxes.
“In the past, we have seen some elections in which the candidates competed to be fiscally responsible, and other elections in which they pandered and ran from the issue. This is a critical moment for the United States and the debt; the next president, whoever he or she is, will have to face a number of looming fiscal issues from the depletion of the Social Security disability fund, to a likely increase in interest rates, to the ongoing extremely expensive retirement of the baby boom generation. Growing the economy is one of the themes of this campaign and yet it cannot happen without a sustainable fiscal plan. Citizens are willing to be part of sensible reforms that would help control the debt and grow the economy, but they will need presidential candidates—and ultimately a president—who is willing to honestly talk about and tackle the issue,” they conclude.
Downloads
- Download the paper
Authors
- Robert L. Bixby- Maya MacGuineas
SUMMARY:
One issue above all others that remains a problem and should transcend partisan agendas is the unsustainable projected growth of the federal debt, write Bob Bixby of the Concord Coalition and Maya MacGuineas of the Committee for a ...

SUMMARY:
One issue above all others that remains a problem and should transcend partisan agendas is the unsustainable projected growth of the federal debt, write Bob Bixby of the Concord Coalition and Maya MacGuineas of the Committee for a Responsible Federal Budget. They warn that candidates “may be tempted to conclude that our fiscal problems are behind us. That would be a mistake,” given that, over the coming decade, the debt is on track to grow by more than $7 trillion and resume a long-term unsustainable path – which is “a matter of arithmetic, not ideology.” Bixby and MacGuineas argue that reducing the long-term debt is in fact an economic growth plan because government debt crowds out productive investments in people, machinery, technology, and new ventures, resulting in fewer job opportunities, lower wages, and slower GDP growth. Economic growth is crucial but alone can’t solve the debt problem, and candidates must be willing to explain the issues to voters: the real cause of projected deficit growth and rising debt is a built-in mismatch between projected revenues and popular benefit programs that operate on autopilot, especially Medicare, Medicaid, Social Security, and interest payment on the debt. They present a list of things candidates should pledge in their first budgets, with a focus on Social Security, health care, and taxes.

“In the past, we have seen some elections in which the candidates competed to be fiscally responsible, and other elections in which they pandered and ran from the issue. This is a critical moment for the United States and the debt; the next president, whoever he or she is, will have to face a number of looming fiscal issues from the depletion of the Social Security disability fund, to a likely increase in interest rates, to the ongoing extremely expensive retirement of the baby boom generation. Growing the economy is one of the themes of this campaign and yet it cannot happen without a sustainable fiscal plan. Citizens are willing to be part of sensible reforms that would help control the debt and grow the economy, but they will need presidential candidates—and ultimately a president—who is willing to honestly talk about and tackle the issue,” they conclude.

My paper last week on “Minimizing debt ceiling crises” inspired a lengthy, dyspeptic reply from Joe Firestone, a noted champion of the platinum coin plan to make the debt ceiling irrelevant. Though Firestone and I agree that our country’s recent debt ceiling showdowns are both fruitless and potentially destructive, a yawning chasm separates our views of America’s contemporary fiscal and monetary system. I am a fiscal conservative who thinks it is imperative that the federal government find a way to match its spending and its revenues in coming decades; Firestone, as he makes clear in a short e-book, believes that this whole way of thinking is deeply misguided and even sadistic. So I have no expectation that we will be able to bridge our gap, but I am grateful for the opportunity to clarify my assumptions that his post gives me.

Firestone criticizes my misgivings about the platinum coin option’s legitimacy as mere “conjecture,” and argues that minting trillion dollar platinum coins (or much higher values—more on that later) for seignorage purposes would be legitimate in both senses of the word: a valid and defensible interpretation of the law, and accepted by the public as a legitimate government action. Of course I must plead guilty to making conjectures—it is impossible to say with certainty what would happen if the government took such a radically unprecedented step. But it seems to me that my conjectures require much less imagination that Firestone’s.

First let’s consider the law. Whereas I characterize any strategy of minting high value platinum coins as exploiting a legal technicality, Firestone thinks “one person’s ‘legal technicality’ is another person’s plain language in the law.” The language at issue is in 31 U.S.C. §§ 5111 and 5112(k) and does, on its face, appear to give the Secretary of the Treasury basically unlimited discretion to mint platinum coins of any denomination. All members of Congress who voted for this bit of legal text have averred that it was meant to facilitate numismatic offerings rather than a fundamental shift in our monetary paradigm—but that doesn’t worry Firestone, who says, “It is of no moment that no individual Congressman intended to give the Executive such broad authority.”

One can make this sort of plain meaning textualist argument, but there is almost no serious student of statutory interpretation who would condone this level of indifference to the larger statutory context and purposes of the legislature. When the executive branch and judiciary seek to make sense of legislative enactments, they ought to do so with some sense of comity for the legislature. Finding text that can be manipulated and turned to purposes wholly alien to the legislators who enacted it is a gross distortion of our system of separated powers.

Firestone and other platinum coin proponents have a response: they say that the use being made of the debt ceiling by hardline opponents of government spending is also a distortion, and one bad turn deserves another, at least during our current era of dysfunction. But I reject this form of reasoning, which presumes things are worse than they really are, pushes us toward a downward spiral of tactical maximalism, and makes it difficult to find our way out of the cycle of dysfunction. If our founding ideals of separated powers and the rightful place of the legislature are to be meaningful, we must be willing to respect them even—or especially—when we find Congress to be obnoxious.

This brings us to the second kind of legitimacy. Even if you think that minting the coin would be legally legitimate in the sense of having a defensible statutory pedigree (on the crude plain meaning grounds advanced above), there is no reason to think that the American public would be inclined to accept it as substantively legitimate. (The divergence of legality and legitimacy, especially during crises, is a major theme of my book.) Why would they hesitate to do so? Well, to state the blindingly obvious, the platinum coin strategy is really weird. It asks Americans to reject all of their most basic intuitions about the government and money. Former Representative Mike Castle (R-DE), who played the biggest role in putting the platinum coin law on the books, nicely summed up what the reaction would be likely to be back in 2013. He said the plan is “so far-fetched and so black helicopter-ish a type of methodology of trying to resolve something like this that I think the public would totally scoff at it…It would be an artificial way of trying to create money and I think everybody will see that.”

Now, public scoffing is unlikely to persuade Firestone, since he sees widely held commonsense ideas about public finance and money as totally wrongheaded and wants to completely repudiate the idea of a budget-constrained government. And I have to be careful here, because I, too, want to reject a widely held intuition about public finance—namely, the idea that we should take a courageous stand against debt by refusing to raise the debt ceiling, an incoherent idea that is nevertheless supported by a wide swathe of the public. But even so, I have to say that Firestone’s idea for a Treasury-led transformation of our monetary system strikes me as deeply undemocratic.

As if to prove just how far-reaching a change the platinum coin maneuver is meant to effect, Firestone tells us that “if the President is wise” he will push not just for a measly $1 trillion coin, but rather for a $100 trillion coin, which would effectively declare the debt ceiling null and void for the foreseeable future. By Firestone’s lights, this move would not be at all inflationary, since that money would never circulate and could be used to support government spending only to the extent that Congress was willing to appropriate money.

That seems…extremely dubious. The idea that we would simply move some numbers around in some electronic ledgers and emerge less constrained by our debt, but without any consequences for the value of our currency does not compute, at least for me—it is a story about price inflation that never once mentions expectations. How could we enter a world in which government debt accumulation would have no negative consequences (for taxes or otherwise), but Congress would nevertheless refrain from spending money in an inflationary way?

Firestone and his colleagues have a correct and unusual understanding of the fact that money is a social construct. That makes their writings genuinely interesting to work through, unsettling in the best sense, because they are willing to imagine how radically different monetary systems might serve social purposes. But they seem to have little sense of how being a consensual social construct makes money a particularly delicate, even fragile, social convention. Instead, they have the sense that they can boldly manipulate the parameters of the system with great positive effects and no important backlash. They would confidently lead the public through the looking glass into a brave new monetary world, and are certain that we would all be better off for the change (with the possible exception of some privileged few well served by the current system—there is a pronounced populist edge to all of these writings, which assume the only apple carts upset by their monetary revolution-in-the-making would be those of the very wealthy).

But for better or for worse—I think better—our democracy doesn’t function that way. To say the public is not ready or willing to step through that looking glass would be an understatement; few people would even be able to comprehend the practicalities of the new regime, and most would immediately and decisively reject the change as illegitimate. America, and I think any representative democracy, is more little-c conservative than this. Firestone throws around that word as an epithet for cowardliness; to my ear, it sounds like a valuable safeguard against foolhardiness

Firestone twice quotes one of my paper’s main takeaways: “A good rule of thumb for executives in troubled times: if you can help it, don’t do anything that can plausibly be characterized as a coup.” He says that so long as Congress holds the constitutional purse strings, nothing the executive does can be regarded as seriously coup-like, and so few Americans would have a strong negative reaction, even to a $100 trillion (that’s $100,000,000,000,000…or roughly 40% of the value of all of the world’s wealth) platinum coin. All I can say is that he and I will have to agree to profoundly disagree on that question. I’m afraid that, like many others, I could not think of such a maneuver without thinking of Dr. Evil.

I’ll end on a conciliatory note. The platinum coin strikes me as just about the worst of all of the clever ideas on the debt ceiling precisely because it relies on creating a physical object that people can regard as both profane and ridiculous. And so I don’t see why other potential back-against-the-wall weird ideas need to necessarily be subject to the same analysis. As I say in a short piece over at U.S. News & World Report that runs through some other options, if Treasury were in extremis “it might make sense to consider some of the more technical ideas mentioned—the more arcane, the fewer blog posts written about them, the better.” Firestone advances one such idea: Treasury issuance of consols, or perpetual bonds. He and others think that these could bring in revenue without counting against the debt ceiling (see comments of this post for arguments to that effect). I’m not at all clear on the legal details of that proposal; my first impression is that with the current statutory architecture of 31 U.S. Code §§ 3101, 3102, and 3121 they probably don’t provide a solution without some further statutory change. But, precisely because there is a historical precedent for consols, and because they represent something far short of a total transformation, they represent a far more fruitful possibility to explore.

Happily, as I write this, it is looking more and more like we may escape the Obama presidency without a debt ceiling crackup—which I would certainly take as vindication of my belief that radical “solutions” to our debt ceiling showdowns may well be worse than the problem. We reform-minded fiscal conservatives can hope that next time around we might replace the debt ceiling with some more useful fiscal control mechanism, but in the meantime we can be glad that this episode did not provide the occasion for revolutionary and uncertain monetary regime change.

Authors

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Mon, 26 Oct 2015 17:15:00 -0400Philip A. Wallach
My paper last week on “Minimizing debt ceiling crises” inspired a lengthy, dyspeptic reply from Joe Firestone, a noted champion of the platinum coin plan to make the debt ceiling irrelevant. Though Firestone and I agree that our country's recent debt ceiling showdowns are both fruitless and potentially destructive, a yawning chasm separates our views of America's contemporary fiscal and monetary system. I am a fiscal conservative who thinks it is imperative that the federal government find a way to match its spending and its revenues in coming decades; Firestone, as he makes clear in a short e-book, believes that this whole way of thinking is deeply misguided and even sadistic. So I have no expectation that we will be able to bridge our gap, but I am grateful for the opportunity to clarify my assumptions that his post gives me.
Firestone criticizes my misgivings about the platinum coin option's legitimacy as mere “conjecture,” and argues that minting trillion dollar platinum coins (or much higher values—more on that later) for seignorage purposes would be legitimate in both senses of the word: a valid and defensible interpretation of the law, and accepted by the public as a legitimate government action. Of course I must plead guilty to making conjectures—it is impossible to say with certainty what would happen if the government took such a radically unprecedented step. But it seems to me that my conjectures require much less imagination that Firestone's.
First let's consider the law. Whereas I characterize any strategy of minting high value platinum coins as exploiting a legal technicality, Firestone thinks “one person's 'legal technicality' is another person's plain language in the law.” The language at issue is in 31 U.S.C. §§ 5111 and 5112(k) and does, on its face, appear to give the Secretary of the Treasury basically unlimited discretion to mint platinum coins of any denomination. All members of Congress who voted for this bit of legal text have averred that it was meant to facilitate numismatic offerings rather than a fundamental shift in our monetary paradigm—but that doesn't worry Firestone, who says, “It is of no moment that no individual Congressman intended to give the Executive such broad authority.”
One can make this sort of plain meaning textualist argument, but there is almost no serious student of statutory interpretation who would condone this level of indifference to the larger statutory context and purposes of the legislature. When the executive branch and judiciary seek to make sense of legislative enactments, they ought to do so with some sense of comity for the legislature. Finding text that can be manipulated and turned to purposes wholly alien to the legislators who enacted it is a gross distortion of our system of separated powers.
Firestone and other platinum coin proponents have a response: they say that the use being made of the debt ceiling by hardline opponents of government spending is also a distortion, and one bad turn deserves another, at least during our current era of dysfunction. But I reject this form of reasoning, which presumes things are worse than they really are, pushes us toward a downward spiral of tactical maximalism, and makes it difficult to find our way out of the cycle of dysfunction. If our founding ideals of separated powers and the rightful place of the legislature are to be meaningful, we must be willing to respect them even—or especially—when we find Congress to be obnoxious.
This brings us to the second kind of legitimacy. Even if you think that minting the coin would be legally legitimate in the sense of having a defensible statutory pedigree (on the crude plain meaning grounds advanced above), there is no reason to think that the American public would be inclined to accept it as substantively legitimate. (The divergence of legality and legitimacy, especially ...
My paper last week on “Minimizing debt ceiling crises” inspired a lengthy, dyspeptic reply from Joe Firestone, a noted champion of the platinum coin plan to make the debt ceiling irrelevant. Though Firestone and I agree that our ...

My paper last week on “Minimizing debt ceiling crises” inspired a lengthy, dyspeptic reply from Joe Firestone, a noted champion of the platinum coin plan to make the debt ceiling irrelevant. Though Firestone and I agree that our country’s recent debt ceiling showdowns are both fruitless and potentially destructive, a yawning chasm separates our views of America’s contemporary fiscal and monetary system. I am a fiscal conservative who thinks it is imperative that the federal government find a way to match its spending and its revenues in coming decades; Firestone, as he makes clear in a short e-book, believes that this whole way of thinking is deeply misguided and even sadistic. So I have no expectation that we will be able to bridge our gap, but I am grateful for the opportunity to clarify my assumptions that his post gives me.

Firestone criticizes my misgivings about the platinum coin option’s legitimacy as mere “conjecture,” and argues that minting trillion dollar platinum coins (or much higher values—more on that later) for seignorage purposes would be legitimate in both senses of the word: a valid and defensible interpretation of the law, and accepted by the public as a legitimate government action. Of course I must plead guilty to making conjectures—it is impossible to say with certainty what would happen if the government took such a radically unprecedented step. But it seems to me that my conjectures require much less imagination that Firestone’s.

First let’s consider the law. Whereas I characterize any strategy of minting high value platinum coins as exploiting a legal technicality, Firestone thinks “one person’s ‘legal technicality’ is another person’s plain language in the law.” The language at issue is in 31 U.S.C. §§ 5111 and 5112(k) and does, on its face, appear to give the Secretary of the Treasury basically unlimited discretion to mint platinum coins of any denomination. All members of Congress who voted for this bit of legal text have averred that it was meant to facilitate numismatic offerings rather than a fundamental shift in our monetary paradigm—but that doesn’t worry Firestone, who says, “It is of no moment that no individual Congressman intended to give the Executive such broad authority.”

One can make this sort of plain meaning textualist argument, but there is almost no serious student of statutory interpretation who would condone this level of indifference to the larger statutory context and purposes of the legislature. When the executive branch and judiciary seek to make sense of legislative enactments, they ought to do so with some sense of comity for the legislature. Finding text that can be manipulated and turned to purposes wholly alien to the legislators who enacted it is a gross distortion of our system of separated powers.

Firestone and other platinum coin proponents have a response: they say that the use being made of the debt ceiling by hardline opponents of government spending is also a distortion, and one bad turn deserves another, at least during our current era of dysfunction. But I reject this form of reasoning, which presumes things are worse than they really are, pushes us toward a downward spiral of tactical maximalism, and makes it difficult to find our way out of the cycle of dysfunction. If our founding ideals of separated powers and the rightful place of the legislature are to be meaningful, we must be willing to respect them even—or especially—when we find Congress to be obnoxious.

This brings us to the second kind of legitimacy. Even if you think that minting the coin would be legally legitimate in the sense of having a defensible statutory pedigree (on the crude plain meaning grounds advanced above), there is no reason to think that the American public would be inclined to accept it as substantively legitimate. (The divergence of legality and legitimacy, especially during crises, is a major theme of my book.) Why would they hesitate to do so? Well, to state the blindingly obvious, the platinum coin strategy is really weird. It asks Americans to reject all of their most basic intuitions about the government and money. Former Representative Mike Castle (R-DE), who played the biggest role in putting the platinum coin law on the books, nicely summed up what the reaction would be likely to be back in 2013. He said the plan is “so far-fetched and so black helicopter-ish a type of methodology of trying to resolve something like this that I think the public would totally scoff at it…It would be an artificial way of trying to create money and I think everybody will see that.”

Now, public scoffing is unlikely to persuade Firestone, since he sees widely held commonsense ideas about public finance and money as totally wrongheaded and wants to completely repudiate the idea of a budget-constrained government. And I have to be careful here, because I, too, want to reject a widely held intuition about public finance—namely, the idea that we should take a courageous stand against debt by refusing to raise the debt ceiling, an incoherent idea that is nevertheless supported by a wide swathe of the public. But even so, I have to say that Firestone’s idea for a Treasury-led transformation of our monetary system strikes me as deeply undemocratic.

As if to prove just how far-reaching a change the platinum coin maneuver is meant to effect, Firestone tells us that “if the President is wise” he will push not just for a measly $1 trillion coin, but rather for a $100 trillion coin, which would effectively declare the debt ceiling null and void for the foreseeable future. By Firestone’s lights, this move would not be at all inflationary, since that money would never circulate and could be used to support government spending only to the extent that Congress was willing to appropriate money.

That seems…extremely dubious. The idea that we would simply move some numbers around in some electronic ledgers and emerge less constrained by our debt, but without any consequences for the value of our currency does not compute, at least for me—it is a story about price inflation that never once mentions expectations. How could we enter a world in which government debt accumulation would have no negative consequences (for taxes or otherwise), but Congress would nevertheless refrain from spending money in an inflationary way?

Firestone and his colleagues have a correct and unusual understanding of the fact that money is a social construct. That makes their writings genuinely interesting to work through, unsettling in the best sense, because they are willing to imagine how radically different monetary systems might serve social purposes. But they seem to have little sense of how being a consensual social construct makes money a particularly delicate, even fragile, social convention. Instead, they have the sense that they can boldly manipulate the parameters of the system with great positive effects and no important backlash. They would confidently lead the public through the looking glass into a brave new monetary world, and are certain that we would all be better off for the change (with the possible exception of some privileged few well served by the current system—there is a pronounced populist edge to all of these writings, which assume the only apple carts upset by their monetary revolution-in-the-making would be those of the very wealthy).

But for better or for worse—I think better—our democracy doesn’t function that way. To say the public is not ready or willing to step through that looking glass would be an understatement; few people would even be able to comprehend the practicalities of the new regime, and most would immediately and decisively reject the change as illegitimate. America, and I think any representative democracy, is more little-c conservative than this. Firestone throws around that word as an epithet for cowardliness; to my ear, it sounds like a valuable safeguard against foolhardiness

Firestone twice quotes one of my paper’s main takeaways: “A good rule of thumb for executives in troubled times: if you can help it, don’t do anything that can plausibly be characterized as a coup.” He says that so long as Congress holds the constitutional purse strings, nothing the executive does can be regarded as seriously coup-like, and so few Americans would have a strong negative reaction, even to a $100 trillion (that’s $100,000,000,000,000…or roughly 40% of the value of all of the world’s wealth) platinum coin. All I can say is that he and I will have to agree to profoundly disagree on that question. I’m afraid that, like many others, I could not think of such a maneuver without thinking of Dr. Evil.

I’ll end on a conciliatory note. The platinum coin strikes me as just about the worst of all of the clever ideas on the debt ceiling precisely because it relies on creating a physical object that people can regard as both profane and ridiculous. And so I don’t see why other potential back-against-the-wall weird ideas need to necessarily be subject to the same analysis. As I say in a short piece over at U.S. News & World Report that runs through some other options, if Treasury were in extremis “it might make sense to consider some of the more technical ideas mentioned—the more arcane, the fewer blog posts written about them, the better.” Firestone advances one such idea: Treasury issuance of consols, or perpetual bonds. He and others think that these could bring in revenue without counting against the debt ceiling (see comments of this post for arguments to that effect). I’m not at all clear on the legal details of that proposal; my first impression is that with the current statutory architecture of 31 U.S. Code §§ 3101, 3102, and 3121 they probably don’t provide a solution without some further statutory change. But, precisely because there is a historical precedent for consols, and because they represent something far short of a total transformation, they represent a far more fruitful possibility to explore.

Happily, as I write this, it is looking more and more like we may escape the Obama presidency without a debt ceiling crackup—which I would certainly take as vindication of my belief that radical “solutions” to our debt ceiling showdowns may well be worse than the problem. We reform-minded fiscal conservatives can hope that next time around we might replace the debt ceiling with some more useful fiscal control mechanism, but in the meantime we can be glad that this episode did not provide the occasion for revolutionary and uncertain monetary regime change.

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http://www.brookings.edu/blogs/fixgov/posts/2015/10/21-debt-ceiling-confrontations-wallach?rssid=debt+debate{9F3D85D9-71C7-4EAA-92B4-C6A6C3CAF223}http://webfeeds.brookings.edu/~/119192027/0/brookingsrss/topics/debtdebate~The-right-way-to-handle-debt-ceiling-confrontationsThe right way to handle debt ceiling confrontations

Once again, our debt ceiling problem is bearing down on us. As usual, there are reasons to expect a last-minute resolution to avert any kind of serious meltdown. But this time, our debt ceiling shenanigans are crossed with a chaotic leadership scramble in the Republican-controlled House of Representatives, making the safe outcome seem far less certain. Who knows what the House is capable of right now—and so perhaps now is the time for some bold action from the executive branch to end this cycle of dangerous debt ceiling confrontations once and for all? In a new Brookings white paper issued today, I argue that it is almost certainly not.

For anyone just tuning in, here’s a quick review of our current situation. After having been suspended for most of 2014, America’s debt ceiling kicked back in as of March 16, 2015. On that date, the statutory limit was reset to our current level of debt, north of $18 trillion. Since then, the Treasury Department has been funding America’s deficit spending through a series of accounting maneuvers known as “extraordinary measures.” Those are about to run out, with Treasury Secretary Jack Lew estimating the date as November 3, and warning that a failure to raise the debt ceiling before then could result in a catastrophic default.

Meanwhile, on September 25, Speaker of the House John Boehner announced his intention to resign from the speakership, and from Congress. His presumed successor, House Majority Leader Kevin McCarthy, withdrew himself from consideration for the speakership on October 8, citing his inability to bridge the growing gap between hardline conservatives and the rest of the Republican caucus. It is unclear whether anyone can bridge that gap and therefore unclear when Republicans will coalesce around a new leader. Boehner lingers as a lame duck and has sensibly indicated that he would like to address the debt ceiling before leaving. He will probably be able to cobble together a majority comprising Democrats and around 40 Republicans to raise the ceiling, perhaps as early as this week.

But should we really trust Boehner’s ability to work this out, given the unfolding and nearly unprecedented collapse of his speakership? Even if we feel sanguine on this front, shouldn’t Boehner’s departure make us worry that a future speaker might not steer clear of a crash?

Fear not, the commentariat is ready to ride to the rescue with a clever if unlikely-sounding solution: the trillion dollar platinum coin! By embracing this zany-but-legal statutory prestidigitation, political observers who fancy themselves hard-headed realists are ready to break this current impasse. And if that sounds a little too banana republic-y for you (which it absolutely should), there are some other gimmicks creative ideas at the ready. Bloomberg’s Matt Levine has become a Latin-spewing promoter of super-high coupon bonds, and for the even more esoterically inclined, there are also workarounds featuring Treasury-sponsored special purpose entities or Federal Reserve-sponsored emergency facilitiesa la Maiden Lane.

All this is fun, and I don’t want to say it is necessarily counterproductive, but these kinds of flashy maneuvers have a serious and largely neglected downside: reaching for any of these possibilities could instantly heat our long-simmering partisan conflict to a boil. Rather than getting the debt ceiling problem out of the way, they would instead escalate it, possibly to the realm of constitutional crisis.

Executive branch officials need a different mindset to find mundane ways to hold the debt ceiling harmless. Although they have incentives to arouse people’s fear as a means of inducing a compromise before their announced deadline, if that deadline were actually to come and pass without an increase, they should quickly change their tune to minimize the significance of the delay. Along with congressional leaders, they should consistently broadcast the Lannister-like message that “The United States always pays its debts,” characterizing any unusual development as a mere malfunction of our separation of powers, not a constitutional paroxysm.

The paper explains why this strategy of de-escalation is less far-fetched than it might originally sound, and far more realistic than the clever ideas. And it considers how it would work in practice, even in a terrible situation in which the Treasury found itself unable to pay all of the nation’s bills on time. Read the whole thing.

Authors

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Wed, 21 Oct 2015 08:00:00 -0400Philip A. Wallach
Once again, our debt ceiling problem is bearing down on us. As usual, there are reasons to expect a last-minute resolution to avert any kind of serious meltdown. But this time, our debt ceiling shenanigans are crossed with a chaotic leadership scramble in the Republican-controlled House of Representatives, making the safe outcome seem far less certain. Who knows what the House is capable of right now—and so perhaps now is the time for some bold action from the executive branch to end this cycle of dangerous debt ceiling confrontations once and for all? In a new Brookings white paper issued today, I argue that it is almost certainly not.
For anyone just tuning in, here's a quick review of our current situation. After having been suspended for most of 2014, America's debt ceiling kicked back in as of March 16, 2015. On that date, the statutory limit was reset to our current level of debt, north of $18 trillion. Since then, the Treasury Department has been funding America's deficit spending through a series of accounting maneuvers known as “extraordinary measures.” Those are about to run out, with Treasury Secretary Jack Lew estimating the date as November 3, and warning that a failure to raise the debt ceiling before then could result in a catastrophic default.
Meanwhile, on September 25, Speaker of the House John Boehner announced his intention to resign from the speakership, and from Congress. His presumed successor, House Majority Leader Kevin McCarthy, withdrew himself from consideration for the speakership on October 8, citing his inability to bridge the growing gap between hardline conservatives and the rest of the Republican caucus. It is unclear whether anyone can bridge that gap and therefore unclear when Republicans will coalesce around a new leader. Boehner lingers as a lame duck and has sensibly indicated that he would like to address the debt ceiling before leaving. He will probably be able to cobble together a majority comprising Democrats and around 40 Republicans to raise the ceiling, perhaps as early as this week.
But should we really trust Boehner's ability to work this out, given the unfolding and nearly unprecedented collapse of his speakership? Even if we feel sanguine on this front, shouldn't Boehner's departure make us worry that a future speaker might not steer clear of a crash?
Fear not, the commentariat is ready to ride to the rescue with a clever if unlikely-sounding solution: the trillion dollar platinum coin! By embracing this zany-but-legal statutory prestidigitation, political observers who fancy themselves hard-headed realists are ready to break this current impasse. And if that sounds a little too banana republic-y for you (which it absolutely should), there are some other gimmicks creative ideas at the ready. Bloomberg's Matt Levine has become a Latin-spewing promoter of super-high coupon bonds, and for the even more esoterically inclined, there are also workarounds featuring Treasury-sponsored special purpose entities or Federal Reserve-sponsored emergency facilities a la Maiden Lane.
All this is fun, and I don't want to say it is necessarily counterproductive, but these kinds of flashy maneuvers have a serious and largely neglected downside: reaching for any of these possibilities could instantly heat our long-simmering partisan conflict to a boil. Rather than getting the debt ceiling problem out of the way, they would instead escalate it, possibly to the realm of constitutional crisis.
Executive branch officials need a different mindset to find mundane ways to hold the debt ceiling harmless. Although they have incentives to arouse people's fear as a means of inducing a compromise before their announced deadline, if that deadline were actually to come and pass without an increase, they should quickly change their tune to minimize the significance of the delay. Along with congressional leaders, they should consistently broadcast the Lannister-like message that ...
Once again, our debt ceiling problem is bearing down on us. As usual, there are reasons to expect a last-minute resolution to avert any kind of serious meltdown. But this time, our debt ceiling shenanigans are crossed with a chaotic leadership ...

Once again, our debt ceiling problem is bearing down on us. As usual, there are reasons to expect a last-minute resolution to avert any kind of serious meltdown. But this time, our debt ceiling shenanigans are crossed with a chaotic leadership scramble in the Republican-controlled House of Representatives, making the safe outcome seem far less certain. Who knows what the House is capable of right now—and so perhaps now is the time for some bold action from the executive branch to end this cycle of dangerous debt ceiling confrontations once and for all? In a new Brookings white paper issued today, I argue that it is almost certainly not.

For anyone just tuning in, here’s a quick review of our current situation. After having been suspended for most of 2014, America’s debt ceiling kicked back in as of March 16, 2015. On that date, the statutory limit was reset to our current level of debt, north of $18 trillion. Since then, the Treasury Department has been funding America’s deficit spending through a series of accounting maneuvers known as “extraordinary measures.” Those are about to run out, with Treasury Secretary Jack Lew estimating the date as November 3, and warning that a failure to raise the debt ceiling before then could result in a catastrophic default.

Meanwhile, on September 25, Speaker of the House John Boehner announced his intention to resign from the speakership, and from Congress. His presumed successor, House Majority Leader Kevin McCarthy, withdrew himself from consideration for the speakership on October 8, citing his inability to bridge the growing gap between hardline conservatives and the rest of the Republican caucus. It is unclear whether anyone can bridge that gap and therefore unclear when Republicans will coalesce around a new leader. Boehner lingers as a lame duck and has sensibly indicated that he would like to address the debt ceiling before leaving. He will probably be able to cobble together a majority comprising Democrats and around 40 Republicans to raise the ceiling, perhaps as early as this week.

But should we really trust Boehner’s ability to work this out, given the unfolding and nearly unprecedented collapse of his speakership? Even if we feel sanguine on this front, shouldn’t Boehner’s departure make us worry that a future speaker might not steer clear of a crash?

Fear not, the commentariat is ready to ride to the rescue with a clever if unlikely-sounding solution: the trillion dollar platinum coin! By embracing this zany-but-legal statutory prestidigitation, political observers who fancy themselves hard-headed realists are ready to break this current impasse. And if that sounds a little too banana republic-y for you (which it absolutely should), there are some other gimmicks creative ideas at the ready. Bloomberg’s Matt Levine has become a Latin-spewing promoter of super-high coupon bonds, and for the even more esoterically inclined, there are also workarounds featuring Treasury-sponsored special purpose entities or Federal Reserve-sponsored emergency facilitiesa la Maiden Lane.

All this is fun, and I don’t want to say it is necessarily counterproductive, but these kinds of flashy maneuvers have a serious and largely neglected downside: reaching for any of these possibilities could instantly heat our long-simmering partisan conflict to a boil. Rather than getting the debt ceiling problem out of the way, they would instead escalate it, possibly to the realm of constitutional crisis.

Executive branch officials need a different mindset to find mundane ways to hold the debt ceiling harmless. Although they have incentives to arouse people’s fear as a means of inducing a compromise before their announced deadline, if that deadline were actually to come and pass without an increase, they should quickly change their tune to minimize the significance of the delay. Along with congressional leaders, they should consistently broadcast the Lannister-like message that “The United States always pays its debts,” characterizing any unusual development as a mere malfunction of our separation of powers, not a constitutional paroxysm.

The paper explains why this strategy of de-escalation is less far-fetched than it might originally sound, and far more realistic than the clever ideas. And it considers how it would work in practice, even in a terrible situation in which the Treasury found itself unable to pay all of the nation’s bills on time. Read the whole thing.

In 2011 and 2013, Americans were treated to debt ceiling showdowns that appeared to bring the nation perilously close to government default and financial implosion—not to mention a full-blown constitutional crisis. As we face another likely showdown in 2015, this chance of disaster still looms. Yet many insiders assume there is nothing to worry about and that it is a near-certainty that the debt ceiling will be raised at the last minute.

In this paper, Philip Wallach argues that with so much at stake, such a dismissive interpretation of contemporary debt ceiling showdowns is dangerous. He explains how officials should pursue ways of escaping this potentially destructive cycle—by removing the ceiling entirely, or by minimizing its riskiness if it persists.

However, Wallach contends there are no clever solutions to this complex problem. While many commentators have offered prescriptions for preemptively dissolving the whole debt ceiling problem, including constitutionally nullifying the debt limit or issuing a trillion dollar platinum coin, no such formula can offer a reliable way out of what is an extremely complex multi-player interaction. In fact, such proposals are likely to bring on the constitutional crises they are designed to head off.

Unfortunately the ideal resolution of the nation’s festering debt ceiling problem—creating a bipartisan consensus on budgetary reform and then replacing the debt ceiling with more useful fiscal control mechanisms—is unlikely to be politically feasible in today’s climate. Thus, Wallach argues, it is essential that U.S. officials prepare for the worst and consider the possibility of a scenario in which negotiations break down and put the Treasury Department in extremis, with no ability to pay all of the nation’s bills on time while adhering to the statutory debt ceiling.

If the U.S. arrives at a situation in which the Treasury Department has no cash on hand to pay its bills coming due and no more room to issue debt under the statutory ceiling, the government must think clearly about which of its options represents the least constitutionally offensive and the least harmful path forward. Wallach explains that, though there would be no good choices, some options would be less bad than others, with the two best options being (1) prioritized debt service combined with delayed payments and (2) debt issuance above the ceiling. The paper considers what conditions might make each preferable, emphasizing that political particulars would be decisive.

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Authors

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Wed, 21 Oct 2015 00:00:00 -0400Philip A. Wallach
In 2011 and 2013, Americans were treated to debt ceiling showdowns that appeared to bring the nation perilously close to government default and financial implosion—not to mention a full-blown constitutional crisis. As we face another likely showdown in 2015, this chance of disaster still looms. Yet many insiders assume there is nothing to worry about and that it is a near-certainty that the debt ceiling will be raised at the last minute.
In this paper, Philip Wallach argues that with so much at stake, such a dismissive interpretation of contemporary debt ceiling showdowns is dangerous. He explains how officials should pursue ways of escaping this potentially destructive cycle—by removing the ceiling entirely, or by minimizing its riskiness if it persists.
However, Wallach contends there are no clever solutions to this complex problem. While many commentators have offered prescriptions for preemptively dissolving the whole debt ceiling problem, including constitutionally nullifying the debt limit or issuing a trillion dollar platinum coin, no such formula can offer a reliable way out of what is an extremely complex multi-player interaction. In fact, such proposals are likely to bring on the constitutional crises they are designed to head off.
Unfortunately the ideal resolution of the nation's festering debt ceiling problem—creating a bipartisan consensus on budgetary reform and then replacing the debt ceiling with more useful fiscal control mechanisms—is unlikely to be politically feasible in today's climate. Thus, Wallach argues, it is essential that U.S. officials prepare for the worst and consider the possibility of a scenario in which negotiations break down and put the Treasury Department in extremis, with no ability to pay all of the nation's bills on time while adhering to the statutory debt ceiling.
If the U.S. arrives at a situation in which the Treasury Department has no cash on hand to pay its bills coming due and no more room to issue debt under the statutory ceiling, the government must think clearly about which of its options represents the least constitutionally offensive and the least harmful path forward. Wallach explains that, though there would be no good choices, some options would be less bad than others, with the two best options being (1) prioritized debt service combined with delayed payments and (2) debt issuance above the ceiling. The paper considers what conditions might make each preferable, emphasizing that political particulars would be decisive.
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Authors
- Philip A. Wallach
In 2011 and 2013, Americans were treated to debt ceiling showdowns that appeared to bring the nation perilously close to government default and financial implosion—not to mention a full-blown constitutional crisis.

In 2011 and 2013, Americans were treated to debt ceiling showdowns that appeared to bring the nation perilously close to government default and financial implosion—not to mention a full-blown constitutional crisis. As we face another likely showdown in 2015, this chance of disaster still looms. Yet many insiders assume there is nothing to worry about and that it is a near-certainty that the debt ceiling will be raised at the last minute.

In this paper, Philip Wallach argues that with so much at stake, such a dismissive interpretation of contemporary debt ceiling showdowns is dangerous. He explains how officials should pursue ways of escaping this potentially destructive cycle—by removing the ceiling entirely, or by minimizing its riskiness if it persists.

However, Wallach contends there are no clever solutions to this complex problem. While many commentators have offered prescriptions for preemptively dissolving the whole debt ceiling problem, including constitutionally nullifying the debt limit or issuing a trillion dollar platinum coin, no such formula can offer a reliable way out of what is an extremely complex multi-player interaction. In fact, such proposals are likely to bring on the constitutional crises they are designed to head off.

Unfortunately the ideal resolution of the nation’s festering debt ceiling problem—creating a bipartisan consensus on budgetary reform and then replacing the debt ceiling with more useful fiscal control mechanisms—is unlikely to be politically feasible in today’s climate. Thus, Wallach argues, it is essential that U.S. officials prepare for the worst and consider the possibility of a scenario in which negotiations break down and put the Treasury Department in extremis, with no ability to pay all of the nation’s bills on time while adhering to the statutory debt ceiling.

If the U.S. arrives at a situation in which the Treasury Department has no cash on hand to pay its bills coming due and no more room to issue debt under the statutory ceiling, the government must think clearly about which of its options represents the least constitutionally offensive and the least harmful path forward. Wallach explains that, though there would be no good choices, some options would be less bad than others, with the two best options being (1) prioritized debt service combined with delayed payments and (2) debt issuance above the ceiling. The paper considers what conditions might make each preferable, emphasizing that political particulars would be decisive.

Event Information

While the 2016 National Defense Authorization Act (NDAA) was passed by Congress earlier this month, President Barack Obama is critical of the legislation and promises to veto it. The NDAA would fund procurement, research, operations, maintenance, personnel and pay, along with other important defense matters. The Act also includes important reforms on acquisition policy and the military pension system. However, the Obama administration opposes the bill's additional $38 billion in Overseas Contingency Operations funding as a means of bypassing Budget Control Act caps.

On October 20, the Center for 21st Century Security and Intelligence at Brookings hosted a discussion on the National Defense Authorization Act and the possible presidential veto. Senator John McCain (R-Ariz.), Chairman of the Senate Armed Services Committee, and Representative Mac Thornberry (R-Texas), Chairman of the House Armed Services Committee, spoke on the issue. Bruce Jones, vice president and director of the Foreign Policy program at Brookings, provided the introductory remarks, and Brookings Senior Fellow Michael O'Hanlon, author of "The Future of Land Warfare," moderated the discussion.

Event Information

While the 2016 National Defense Authorization Act (NDAA) was passed by Congress earlier this month, President Barack Obama is critical of the legislation and promises to veto it. The NDAA would fund procurement, research, operations, maintenance, personnel and pay, along with other important defense matters. The Act also includes important reforms on acquisition policy and the military pension system. However, the Obama administration opposes the bill's additional $38 billion in Overseas Contingency Operations funding as a means of bypassing Budget Control Act caps.

On October 20, the Center for 21st Century Security and Intelligence at Brookings hosted a discussion on the National Defense Authorization Act and the possible presidential veto. Senator John McCain (R-Ariz.), Chairman of the Senate Armed Services Committee, and Representative Mac Thornberry (R-Texas), Chairman of the House Armed Services Committee, spoke on the issue. Bruce Jones, vice president and director of the Foreign Policy program at Brookings, provided the introductory remarks, and Brookings Senior Fellow Michael O'Hanlon, author of "The Future of Land Warfare," moderated the discussion.

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http://www.brookings.edu/blogs/fixgov/posts/2015/10/15-open-letter-speaker-boehner-debt-ceiling-wallach?rssid=debt+debate{6011CBB5-BD03-4814-B121-D813AC57DECD}http://webfeeds.brookings.edu/~/117832493/0/brookingsrss/topics/debtdebate~An-open-letter-to-Speaker-John-Boehner-regarding-the-debt-ceilingAn open letter to Speaker John Boehner regarding the debt ceiling

Dear Speaker Boehner,

I was overjoyed to learn that you will be attempting to move a debt ceiling increase before you leave office. This is unquestionably the right thing to do: for fiscal conservatives, for your party, and for your country. Failing to do so would open the door to the possibility that the next Speaker’s tenure would begin with an unwinnable confrontation with the White House resulting, at best, in abject defeat and, at worst, in a constitutional crisis.

Many in the conservative wing of your Republican Party believe that any debt limit increase should be accompanied by significant spending cuts and that refusing to raise the debt limit provides them leverage to obtain concessions from Democrats that would otherwise be unattainable. In the past that was also your position, including during the explosive confrontation of 2011. But the premise behind this strategy is unsound. Though it may seem that needed increases give Congress leverage, they in fact only provide rhetorical opportunities. In the end, Congress will have no choice but to send the president a bill he is mostly happy to accept, which is likely to be a nearly clean increase.

The few instances in which deficit reduction policies were attached to debt ceiling confrontations—namely 1985, 1996, and 2011—do not disprove this point, because they came at moments in which both parties were forced to accept the need for deficit reductions. These moments of deficit reduction were possible due to a run up in interest on the national debt by 1985, and strong Republican victories in 1994 and 2010. There is a good case to be made that attaching debt ceiling negotiations to the larger fiscal debates actually limited fiscal conservatives’ effectiveness in these instances. You very wisely moved away from making debt ceiling increases the focal point for fiscal policymaking after 2011, suggesting that you and many of your colleagues learned the right lessons about the volatility and ineffectiveness of this tactic. The fact that the need to increase the debt ceiling (which your Republican colleagues resisted doing without extensive conditions) cut off fiscal negotiations in the President’s favor in October 2013 reinforces the point.

Far from allowing Democrats to dictate the future course of spending, then, increasing the debt ceiling so as to withdraw it as a matter of concern from ongoing fiscal debates will actually strengthen Republicans’ negotiating position. As Republicans seek to coalesce around a budgetary path for the next decade acceptable to nearly the whole conference, an increase of the debt ceiling will allow them to focus their attention squarely on questions of spending and work to craft an appropriate spending bill ahead of the December 11 expiration of the continuing resolution just passed.

At that point, if the new Speaker is able to pass a spending bill the Senate agrees to, they may confront President Obama’s veto pen, and a government shutdown might well ensue. That would be unfortunate for the country and needlessly demoralizing to the federal workforce—and it might well be bad politics for Republicans. But with the debt ceiling out of the picture, nobody could credibly allege it would be needlessly putting the nation’s whole future at stake. The American people would be able to assess Republicans’ budget against the president’s unwillingness to accept it, and judge accordingly. If the debt ceiling remained in play, however, the White House could occupy the moral high ground by constantly raising alarms about the possibility of default.

If you find a way to pass a debt ceiling increase, it is absolutely certain that some Republicans will denounce you. After all, avoiding a debt ceiling fight is precisely what Harry Reid and the President want you to do. But having this crowd judge you harshly is already a foregone conclusion, as you acknowledged in your decision to resign. You have little to lose, and the country has much to gain. So do opponents of long-term budget deficits, if they truly want to get their act together and pass a viable plan rather than merely spouting off (which, unfortunately, is not entirely clear).

Best of all, of course, would be if you could engineer a deal that removes the debt ceiling entirely and replaces it with process reforms more likely to produce meaningful change, such as bringing entitlement spending into the annual budgeting process. Ending your time in office with such a lasting improvement to your country’s economic and political stability may be impossible this late in the day.

But it points the way: the larger the debt ceiling increase (or the longer the suspension), the better. Relieving the 114th Congress of the burden of dealing with the debt ceiling again would be a great service, especially to the new speaker. Rather than beginning with a fight that former Speaker Gingrich called “a dead loser” and likely worsening intraparty tensions, the new Republican leadership could instead begin the work of unifying the party behind a coherent policy vision for the future.

With respect for all of your service through these difficult years,

Philip Wallach

Authors

]]>
Thu, 15 Oct 2015 14:00:00 -0400Philip A. Wallach
Dear Speaker Boehner,
I was overjoyed to learn that you will be attempting to move a debt ceiling increase before you leave office. This is unquestionably the right thing to do: for fiscal conservatives, for your party, and for your country. Failing to do so would open the door to the possibility that the next Speaker's tenure would begin with an unwinnable confrontation with the White House resulting, at best, in abject defeat and, at worst, in a constitutional crisis.
Many in the conservative wing of your Republican Party believe that any debt limit increase should be accompanied by significant spending cuts and that refusing to raise the debt limit provides them leverage to obtain concessions from Democrats that would otherwise be unattainable. In the past that was also your position, including during the explosive confrontation of 2011. But the premise behind this strategy is unsound. Though it may seem that needed increases give Congress leverage, they in fact only provide rhetorical opportunities. In the end, Congress will have no choice but to send the president a bill he is mostly happy to accept, which is likely to be a nearly clean increase.
The few instances in which deficit reduction policies were attached to debt ceiling confrontations—namely 1985, 1996, and 2011—do not disprove this point, because they came at moments in which both parties were forced to accept the need for deficit reductions. These moments of deficit reduction were possible due to a run up in interest on the national debt by 1985, and strong Republican victories in 1994 and 2010. There is a good case to be made that attaching debt ceiling negotiations to the larger fiscal debates actually limited fiscal conservatives' effectiveness in these instances. You very wisely moved away from making debt ceiling increases the focal point for fiscal policymaking after 2011, suggesting that you and many of your colleagues learned the right lessons about the volatility and ineffectiveness of this tactic. The fact that the need to increase the debt ceiling (which your Republican colleagues resisted doing without extensive conditions) cut off fiscal negotiations in the President's favor in October 2013 reinforces the point.
Far from allowing Democrats to dictate the future course of spending, then, increasing the debt ceiling so as to withdraw it as a matter of concern from ongoing fiscal debates will actually strengthen Republicans' negotiating position. As Republicans seek to coalesce around a budgetary path for the next decade acceptable to nearly the whole conference, an increase of the debt ceiling will allow them to focus their attention squarely on questions of spending and work to craft an appropriate spending bill ahead of the December 11 expiration of the continuing resolution just passed.
At that point, if the new Speaker is able to pass a spending bill the Senate agrees to, they may confront President Obama's veto pen, and a government shutdown might well ensue. That would be unfortunate for the country and needlessly demoralizing to the federal workforce—and it might well be bad politics for Republicans. But with the debt ceiling out of the picture, nobody could credibly allege it would be needlessly putting the nation's whole future at stake. The American people would be able to assess Republicans' budget against the president's unwillingness to accept it, and judge accordingly. If the debt ceiling remained in play, however, the White House could occupy the moral high ground by constantly raising alarms about the possibility of default.
If you find a way to pass a debt ceiling increase, it is absolutely certain that some Republicans will denounce you. After all, avoiding a debt ceiling fight is precisely what Harry Reid and the President want you to do. But having this crowd judge you harshly is already a foregone conclusion, as you acknowledged in your decision to resign. You have little to lose, and the ...
Dear Speaker Boehner,
I was overjoyed to learn that you will be attempting to move a debt ceiling increase before you leave office. This is unquestionably the right thing to do: for fiscal conservatives, for your party, and for your country.

Dear Speaker Boehner,

I was overjoyed to learn that you will be attempting to move a debt ceiling increase before you leave office. This is unquestionably the right thing to do: for fiscal conservatives, for your party, and for your country. Failing to do so would open the door to the possibility that the next Speaker’s tenure would begin with an unwinnable confrontation with the White House resulting, at best, in abject defeat and, at worst, in a constitutional crisis.

Many in the conservative wing of your Republican Party believe that any debt limit increase should be accompanied by significant spending cuts and that refusing to raise the debt limit provides them leverage to obtain concessions from Democrats that would otherwise be unattainable. In the past that was also your position, including during the explosive confrontation of 2011. But the premise behind this strategy is unsound. Though it may seem that needed increases give Congress leverage, they in fact only provide rhetorical opportunities. In the end, Congress will have no choice but to send the president a bill he is mostly happy to accept, which is likely to be a nearly clean increase.

The few instances in which deficit reduction policies were attached to debt ceiling confrontations—namely 1985, 1996, and 2011—do not disprove this point, because they came at moments in which both parties were forced to accept the need for deficit reductions. These moments of deficit reduction were possible due to a run up in interest on the national debt by 1985, and strong Republican victories in 1994 and 2010. There is a good case to be made that attaching debt ceiling negotiations to the larger fiscal debates actually limited fiscal conservatives’ effectiveness in these instances. You very wisely moved away from making debt ceiling increases the focal point for fiscal policymaking after 2011, suggesting that you and many of your colleagues learned the right lessons about the volatility and ineffectiveness of this tactic. The fact that the need to increase the debt ceiling (which your Republican colleagues resisted doing without extensive conditions) cut off fiscal negotiations in the President’s favor in October 2013 reinforces the point.

Far from allowing Democrats to dictate the future course of spending, then, increasing the debt ceiling so as to withdraw it as a matter of concern from ongoing fiscal debates will actually strengthen Republicans’ negotiating position. As Republicans seek to coalesce around a budgetary path for the next decade acceptable to nearly the whole conference, an increase of the debt ceiling will allow them to focus their attention squarely on questions of spending and work to craft an appropriate spending bill ahead of the December 11 expiration of the continuing resolution just passed.

At that point, if the new Speaker is able to pass a spending bill the Senate agrees to, they may confront President Obama’s veto pen, and a government shutdown might well ensue. That would be unfortunate for the country and needlessly demoralizing to the federal workforce—and it might well be bad politics for Republicans. But with the debt ceiling out of the picture, nobody could credibly allege it would be needlessly putting the nation’s whole future at stake. The American people would be able to assess Republicans’ budget against the president’s unwillingness to accept it, and judge accordingly. If the debt ceiling remained in play, however, the White House could occupy the moral high ground by constantly raising alarms about the possibility of default.

If you find a way to pass a debt ceiling increase, it is absolutely certain that some Republicans will denounce you. After all, avoiding a debt ceiling fight is precisely what Harry Reid and the President want you to do. But having this crowd judge you harshly is already a foregone conclusion, as you acknowledged in your decision to resign. You have little to lose, and the country has much to gain. So do opponents of long-term budget deficits, if they truly want to get their act together and pass a viable plan rather than merely spouting off (which, unfortunately, is not entirely clear).

Best of all, of course, would be if you could engineer a deal that removes the debt ceiling entirely and replaces it with process reforms more likely to produce meaningful change, such as bringing entitlement spending into the annual budgeting process. Ending your time in office with such a lasting improvement to your country’s economic and political stability may be impossible this late in the day.

But it points the way: the larger the debt ceiling increase (or the longer the suspension), the better. Relieving the 114th Congress of the burden of dealing with the debt ceiling again would be a great service, especially to the new speaker. Rather than beginning with a fight that former Speaker Gingrich called “a dead loser” and likely worsening intraparty tensions, the new Republican leadership could instead begin the work of unifying the party behind a coherent policy vision for the future.

With respect for all of your service through these difficult years,

Philip Wallach

Authors

]]>
http://www.brookings.edu/blogs/fixgov/posts/2015/09/14-how-did-we-get-here-budget-showdown-congress-reynolds?rssid=debt+debate{DA4DFEA5-A9B7-4A93-972A-9EDF4C86D354}http://webfeeds.brookings.edu/~/111380192/0/brookingsrss/topics/debtdebate~The-budget-showdown-How-did-we-get-hereThe budget showdown: How did we get here?

Among the many items on the agenda for Congress and the White House this fall is how to fund many of the federal government’s key programs—including defense, education, science research, and foreign aid—and whether a government shutdown can be averted in the process. There are many ways the two sides might resolve the issues at play but first, let’s review how we got here.

Certainly, a series of distinct choices made by Congress and the president have played a part. In 2011, as part of the deal to increase the debt ceiling, Congress passed, and the president signed, the Budget Control Act (BCA), which included caps on discretionary spending between 2012 and 2021. The BCA also created the so-called congressional “Supercommittee,” which was supposed to produce a plan for reducing the deficit by $1.5 trillion over ten years. If it failed to do so (and spoiler alert, it did), the BCA’s discretionary spending limits would get even more restrictive.

In December 2013, led by Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA), Congress used savings from military and federal civilian retirement, education, and transportation programs to effectively increase the BCA’s spending caps for two years, 2014 and 2015. (Technically, this was accomplished by offsetting part of the additional, more restrictive limits that took effect after the Supercommittee failed, and not by increasing the BCA’s underlying caps.) As of October 1, however, the 2011 law’s original restrictions will return—and should Congress and the president choose to exceed those caps, many discretionary programs will be subject to an across-the-board cut, better known as the sequester.

In the face of the return of this more restrictive budget environment, President Obama and congressional Democrats have taken a hard line on the limits on non-defense discretionary spending. Senate Democrats have pledged to obstruct, and Obama has promisedto veto, all appropriations measures until a broader deal that allows for more generous spending on things like education, housing, energy assistance, and science research is reached. Some congressional Republicans, meanwhile, have vowed to oppose even a short-term continuing resolution that would provide more time for deal-making unless that bill reflects key priorities, including eliminating any federal funding for Planned Parenthood.

Journalists have characterized this negotiating situation as “epic” and “explosive,” but this sort of late-stage, multi-bill deal-making should feel somewhat familiar. As research by Peter Hanson (summarized nicely here) has documented, a full 39 percent of all appropriations bills between 1975 and 2012 were handled either as part of an omnibus package or a year-long continuing resolution. According to the Congressional Research Service, moreover, delayed action on appropriations has plagued Presidents Bush and Obama alike; since 2001, only 11 of 182 appropriations bills were enacted by the start of the new fiscal year, and only 47 were passed as standalone bills.

Not only have we been here before, but research by Jonathan Woon and Sarah Anderson suggests this year’s conditions are ripe for this kind of delay. Both ideological division across institutions (between the president and congressional majorities) and within Congress itself (between the majority party’s appropriators and the average member of the majority party in each chamber), they argue, draw out the process. Under their argument, as ideological distances increase, the actors involved are more willing to sacrifice other legislative activities in favor of a longer appropriations process.

How does the current Congress stack up on these measures? The first graph below plots Woon and Anderson’s measure of ideological distance between Congress and the president over time. Thanks to Republicans regaining the majority in the Senate last fall, Congress and the president are farther apart on this measure than at any previous point in the Obama administration. And except for the two years at the end of the Bush 43 administration when the Democrats controlled Congress, Congress and the president haven’t been this far apart since the end of the Clinton administration.

Following Woon and Anderson, distance here is measured using Common Space DW-NOMINATE scores, available from voteview.com. The distance presented is the absolute distance between the president’s score and the midpoint between the median score for the majority party in the House and the majority party in the Senate.

It’s not just disagreement between Congress and the president that is likely contributing to delayed appropriating this year, however. The graph below uses similar data to compare the majority party members of each house’s appropriations committee to the majority party’s membership in the chamber as a whole.

The graph shows the absolute distance between the Common Space DW-NOMINATE score for the median member of each chamber’s majority party and the median member of the majority party’s contingent on the corresponding chamber’s appropriations committee.

Here, we see again that the 114th Congress is also plagued by internal divisions between House and Senate appropriators and the other members of their parties that are likely slowing down the appropriations process. Indeed, even the chair of the House Appropriations panel, Rep. Hal Rogers (R-KY), has lamented the disconnect between his preferred approach and that of his caucus.

Within this partisan and ideological context, finally, institutional rules and norms haven’t helped Congress’s efforts to move appropriations measures in a timely fashion. In July, House Speaker John Boehner pulled the Interior-Environment appropriations bill from floor consideration. The House had adopted two Democratic-sponsored amendments that would have limited the display of the Confederate flag on federal lands, but under pressure from southern members of his caucus, the bill’s Republican floor manager, Rep. Ken Calvert (R-CA), offered an amendment relaxing those new restrictions. So angry were Democrats about the move that Boehner eventually pulled all appropriations measures from floor consideration out of concern that they would attach amendments related to the flag to every single spending bill.

Given the power of the House majority leadership to control debate in the chamber via the Rules Committee, how did this conflict arise? Unlike most other measures, appropriations bills are still reliably open to amendment in the House. Since 1995, 77 percent of the regular appropriations bills have been considered under some type of open amending process, and to date, the only measures considered under any kind of open rules in the House this year were appropriations bills.

Given this precedent for more open debate, the House majority party can find itself calling new parliamentary moves on the fly if they want to keep the process moving. In 2009, for example, the Democratic House leadership, concerned about the 100-plus amendments filed by minority party Republicans, changed tactics midstream to exert more control over the debate on the appropriations bill for the Commerce, Justice, and State Departments. While Boehner could have pursued such a strategy back in July, doing so would have meant violating a key pledge made after he assumed leadership of the chamber.

Congress and the president may have driven their negotiating bus to the brink of a cliff again this fall, but a range of institutional factors that have paved the road—and will certainly affect any deal they manage to reach.

Authors

]]>
Mon, 14 Sep 2015 08:00:00 -0400Molly E. Reynolds
Among the many items on the agenda for Congress and the White House this fall is how to fund many of the federal government's key programs—including defense, education, science research, and foreign aid—and whether a government shutdown can be averted in the process. There are many ways the two sides might resolve the issues at play but first, let's review how we got here.
Certainly, a series of distinct choices made by Congress and the president have played a part. In 2011, as part of the deal to increase the debt ceiling, Congress passed, and the president signed, the Budget Control Act (BCA), which included caps on discretionary spending between 2012 and 2021. The BCA also created the so-called congressional “Supercommittee,” which was supposed to produce a plan for reducing the deficit by $1.5 trillion over ten years. If it failed to do so (and spoiler alert, it did), the BCA's discretionary spending limits would get even more restrictive.
In December 2013, led by Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA), Congress used savings from military and federal civilian retirement, education, and transportation programs to effectively increase the BCA's spending caps for two years, 2014 and 2015. (Technically, this was accomplished by offsetting part of the additional, more restrictive limits that took effect after the Supercommittee failed, and not by increasing the BCA's underlying caps.) As of October 1, however, the 2011 law's original restrictions will return—and should Congress and the president choose to exceed those caps, many discretionary programs will be subject to an across-the-board cut, better known as the sequester.
In the face of the return of this more restrictive budget environment, President Obama and congressional Democrats have taken a hard line on the limits on non-defense discretionary spending. Senate Democrats have pledged to obstruct, and Obama has promised to veto, all appropriations measures until a broader deal that allows for more generous spending on things like education, housing, energy assistance, and science research is reached. Some congressional Republicans, meanwhile, have vowed to oppose even a short-term continuing resolution that would provide more time for deal-making unless that bill reflects key priorities, including eliminating any federal funding for Planned Parenthood.
Journalists have characterized this negotiating situation as “epic” and “explosive,” but this sort of late-stage, multi-bill deal-making should feel somewhat familiar. As research by Peter Hanson (summarized nicely here) has documented, a full 39 percent of all appropriations bills between 1975 and 2012 were handled either as part of an omnibus package or a year-long continuing resolution. According to the Congressional Research Service, moreover, delayed action on appropriations has plagued Presidents Bush and Obama alike; since 2001, only 11 of 182 appropriations bills were enacted by the start of the new fiscal year, and only 47 were passed as standalone bills.
Not only have we been here before, but research by Jonathan Woon and Sarah Anderson suggests this year's conditions are ripe for this kind of delay. Both ideological division across institutions (between the president and congressional majorities) and within Congress itself (between the majority party's appropriators and the average member of the majority party in each chamber), they argue, draw out the process. Under their argument, as ideological distances increase, the actors involved are more willing to sacrifice other legislative activities in favor of a longer appropriations process.
How does the current Congress stack up on these measures? The first graph below plots Woon and Anderson's measure of ideological distance between Congress and the president over time. Thanks to Republicans regaining the majority in the Senate last fall, Congress and the president are farther ...
Among the many items on the agenda for Congress and the White House this fall is how to fund many of the federal government's key programs—including defense, education, science research, and foreign aid—and whether a government ...

Among the many items on the agenda for Congress and the White House this fall is how to fund many of the federal government’s key programs—including defense, education, science research, and foreign aid—and whether a government shutdown can be averted in the process. There are many ways the two sides might resolve the issues at play but first, let’s review how we got here.

Certainly, a series of distinct choices made by Congress and the president have played a part. In 2011, as part of the deal to increase the debt ceiling, Congress passed, and the president signed, the Budget Control Act (BCA), which included caps on discretionary spending between 2012 and 2021. The BCA also created the so-called congressional “Supercommittee,” which was supposed to produce a plan for reducing the deficit by $1.5 trillion over ten years. If it failed to do so (and spoiler alert, it did), the BCA’s discretionary spending limits would get even more restrictive.

In December 2013, led by Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA), Congress used savings from military and federal civilian retirement, education, and transportation programs to effectively increase the BCA’s spending caps for two years, 2014 and 2015. (Technically, this was accomplished by offsetting part of the additional, more restrictive limits that took effect after the Supercommittee failed, and not by increasing the BCA’s underlying caps.) As of October 1, however, the 2011 law’s original restrictions will return—and should Congress and the president choose to exceed those caps, many discretionary programs will be subject to an across-the-board cut, better known as the sequester.

In the face of the return of this more restrictive budget environment, President Obama and congressional Democrats have taken a hard line on the limits on non-defense discretionary spending. Senate Democrats have pledged to obstruct, and Obama has promisedto veto, all appropriations measures until a broader deal that allows for more generous spending on things like education, housing, energy assistance, and science research is reached. Some congressional Republicans, meanwhile, have vowed to oppose even a short-term continuing resolution that would provide more time for deal-making unless that bill reflects key priorities, including eliminating any federal funding for Planned Parenthood.

Journalists have characterized this negotiating situation as “epic” and “explosive,” but this sort of late-stage, multi-bill deal-making should feel somewhat familiar. As research by Peter Hanson (summarized nicely here) has documented, a full 39 percent of all appropriations bills between 1975 and 2012 were handled either as part of an omnibus package or a year-long continuing resolution. According to the Congressional Research Service, moreover, delayed action on appropriations has plagued Presidents Bush and Obama alike; since 2001, only 11 of 182 appropriations bills were enacted by the start of the new fiscal year, and only 47 were passed as standalone bills.

Not only have we been here before, but research by Jonathan Woon and Sarah Anderson suggests this year’s conditions are ripe for this kind of delay. Both ideological division across institutions (between the president and congressional majorities) and within Congress itself (between the majority party’s appropriators and the average member of the majority party in each chamber), they argue, draw out the process. Under their argument, as ideological distances increase, the actors involved are more willing to sacrifice other legislative activities in favor of a longer appropriations process.

How does the current Congress stack up on these measures? The first graph below plots Woon and Anderson’s measure of ideological distance between Congress and the president over time. Thanks to Republicans regaining the majority in the Senate last fall, Congress and the president are farther apart on this measure than at any previous point in the Obama administration. And except for the two years at the end of the Bush 43 administration when the Democrats controlled Congress, Congress and the president haven’t been this far apart since the end of the Clinton administration.

Following Woon and Anderson, distance here is measured using Common Space DW-NOMINATE scores, available from voteview.com. The distance presented is the absolute distance between the president’s score and the midpoint between the median score for the majority party in the House and the majority party in the Senate.

It’s not just disagreement between Congress and the president that is likely contributing to delayed appropriating this year, however. The graph below uses similar data to compare the majority party members of each house’s appropriations committee to the majority party’s membership in the chamber as a whole.

The graph shows the absolute distance between the Common Space DW-NOMINATE score for the median member of each chamber’s majority party and the median member of the majority party’s contingent on the corresponding chamber’s appropriations committee.

Here, we see again that the 114th Congress is also plagued by internal divisions between House and Senate appropriators and the other members of their parties that are likely slowing down the appropriations process. Indeed, even the chair of the House Appropriations panel, Rep. Hal Rogers (R-KY), has lamented the disconnect between his preferred approach and that of his caucus.

Within this partisan and ideological context, finally, institutional rules and norms haven’t helped Congress’s efforts to move appropriations measures in a timely fashion. In July, House Speaker John Boehner pulled the Interior-Environment appropriations bill from floor consideration. The House had adopted two Democratic-sponsored amendments that would have limited the display of the Confederate flag on federal lands, but under pressure from southern members of his caucus, the bill’s Republican floor manager, Rep. Ken Calvert (R-CA), offered an amendment relaxing those new restrictions. So angry were Democrats about the move that Boehner eventually pulled all appropriations measures from floor consideration out of concern that they would attach amendments related to the flag to every single spending bill.

Given the power of the House majority leadership to control debate in the chamber via the Rules Committee, how did this conflict arise? Unlike most other measures, appropriations bills are still reliably open to amendment in the House. Since 1995, 77 percent of the regular appropriations bills have been considered under some type of open amending process, and to date, the only measures considered under any kind of open rules in the House this year were appropriations bills.

Given this precedent for more open debate, the House majority party can find itself calling new parliamentary moves on the fly if they want to keep the process moving. In 2009, for example, the Democratic House leadership, concerned about the 100-plus amendments filed by minority party Republicans, changed tactics midstream to exert more control over the debate on the appropriations bill for the Commerce, Justice, and State Departments. While Boehner could have pursued such a strategy back in July, doing so would have meant violating a key pledge made after he assumed leadership of the chamber.

Congress and the president may have driven their negotiating bus to the brink of a cliff again this fall, but a range of institutional factors that have paved the road—and will certainly affect any deal they manage to reach.

Yes. And that might mean no. It’s complicated, and caught up in an intense ongoing partisan struggle, which makes it difficult for anyone to analyze dispassionately. But let’s give it a try.

Everyone is so concerned about our recent habit of debt ceiling standoffs between Congress and the President because if these tense negotiations fail to raise the statutory debt limit by the time Treasury’s ability to manipulate its accounts runs out—a result that neither side desires—it would mean that the United States would be unable to make timely payments on its debt service, to its many employees and contractors, or to the millions of Americans who depend on transfers of various sorts. The most disastrous economic consequences would come from the reputational damage to America’s creditworthiness, which would be caused most directly by a failure to make interest payments to debt holders on time. The most disastrous political consequences would come from the specter of seniors who depend on their Social Security checks finding themselves scrambling to keep the lights on.

Republicans thus have a proposal: they will remove the possibility of missed debt payments or Social Security checks. Their vehicle for this change is the very simple Default Prevention Act (H.R. 692), which the House Ways and Means Committee recently advanced. The 377-word bill would put two holes in the debt ceiling for a cash-strapped Treasury to pop its head through in an emergency, one for debt service and one for Social Security. The statutory debt limit would still remain at the same number, but the Treasury could issue debt for these purposes that would effectively not count against that limit. This would essentially be a partial rolling back of the debt limit; two of the most important areas of Treasury operations would now be subject to an alternative system of congressional control involving extra congressional oversight (the bill has heightened reporting requirements for any debt issued in this way) instead of the debt ceiling.

Republicans are eager to tout the merits of their proposal. Committee Chairman Paul Ryan (R-WI) emphasizes what a big confidence boost the economy would get from “tak[ing] default off the table,” and his committee has a shiny new page entitled, “Default? Not on our watch.” By their lights, this bill is a pure process improvement, ensuring that commitments are met but without “raising the debt limit.” Any future debt ceiling showdowns will be less hazardous than those of the recent past. What’s not to like?

A lot, say Democrats, all of whom voted against the bill in the Ways and Means Committee. Ranking Member Sander Levin (D-MI) offers a quick rebuttal entitled, “Experts agree: Prioritization is ‘default by another name.’” (That quotation comes from a not altogether disinterested party, Secretary of the Treasury Jack Lew.) Law Professor Neil Buchanan, author of a very useful exploration of the recent debt ceiling fights, is apoplectic, headlining his reaction, “House Republicans’ Deep Cynicism: Pay the Rich and Play Politics With Everyone Else.” Why are they so against this limited de-limiting of the debt?

Rather than this bill in particular, much of their ire is directed more generally against “prioritization,” which is the idea that an inability to expand the debt would force government to make some payments rather than others from its cash flow (which is somewhat erratic on a day to day basis). Many Republicans who have downplayed the risks from the debt ceiling fights have claimed that prioritization always existed as an option to ensure that vital payments could be made on time, even without any legal changes. Democrats and the Treasury Department are right to vigorously contest these assertions: logistically, prioritization would be a dicey proposition; legally, it has no basis and would thus be (or at least seem) deeply arbitrary; constitutionally, it is a monstrosity for Congress to pass a set of mutually inconsistent laws and then expect the President to just sort it all out somehow. To the extent that the Default Prevention Act codifies the idea of prioritization, then, it seems like a bad idea.

That line of argumentation is mostly incoherent. By changing the existing statutory framework, the Default Prevention Act would allow—indeed, codify—prioritization, thus removing the thorniest legal and constitutional difficulties when it comes to debt and Social Security payments. The feasibility of making debt and Social Security payments in full and on time while other payments are withheld could be addressed, not instantaneously, and perhaps not in time for this year’s crisis, but certainly before too long. It’s not as if it is logically impossible to separate these things out, just that configuring government computer systems can’t and won’t happen right in the moment of a crisis. But changing the law could set a system change into motion well in advance.

True, because the Default Prevention Act addresses only debt and Social Security payments, it would not resolve the difficult questions about what else ought to be paid for, and when, out of the government’s cash flows. To that extent the improvement it offers is a limited one, and I have argued we would be far better off if we did away with the debt ceiling altogether. But why should a limited improvement should be so offensive?

The answer is that Democrats fear that a less scary debt ceiling breakdown will be a more likely debt ceiling breakdown, with Republicans far more willing than before to hold firm in their demands attached to debt ceiling increases. Several Democratic members voiced fears that once Republicans have planted the “no default” flag, they will be ready to hurl themselves into a debt ceiling fight with renewed fervor, rather than moderating the logic of the hardline anti-spending wing of their party.

And then Democrats say that the point where we’d end up, in which debt service and Social Security recipients are able to go on as normal but everything else is still thrown into chaos, would be just “default by another name,” and we would in fact be no better off for having the Default Prevention Act in place. That strikes me as bluster. Debt market participants are mostly sophisticated (indeed, this is the basis for the rather overwrought cry that Republicans are out to ensure that “China and rich people” get paid first) and if they saw their future interest payments as no longer subject to any debt ceiling, it is hard to understand why they would think those payments were less certain to be made on time, regardless of how badly other things were going.

Even if these claims that everything would be just as bad even if debt payments got made are dubious, Democrats’ broader case makes plenty of sense given their concerns. The President is actually extremely advantaged in any debt ceiling standoff under the current “pass or total disaster” status quo; presumably that advantage would shrink if we move to a “pass or mostly disaster” regime. And maybe negotiations would be more likely to go off the rails with the reform in place, with consequences that would be plenty damaging enough to millions of normal Americans and to America’s reputation as a reliable partner.

Does that worry justify opposing a partial, imperfect reform of the debt ceiling? I wonder if anyone stands sufficiently aloof from the dynamics of the partisan budget fights to give an answer untainted by strategic considerations. For my part a world with the Default Prevention Act passed into law would not strike me as a much scarier place. Probably President Obama’s veto pen means that the symbolic rhetoric flying back and forth is more important than the substantive policy questions for now.

Authors

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Mon, 14 Sep 2015 16:15:00 -0400Philip A. Wallach
Yes. And that might mean no. It's complicated, and caught up in an intense ongoing partisan struggle, which makes it difficult for anyone to analyze dispassionately. But let's give it a try.
Everyone is so concerned about our recent habit of debt ceiling standoffs between Congress and the President because if these tense negotiations fail to raise the statutory debt limit by the time Treasury's ability to manipulate its accounts runs out—a result that neither side desires—it would mean that the United States would be unable to make timely payments on its debt service, to its many employees and contractors, or to the millions of Americans who depend on transfers of various sorts. The most disastrous economic consequences would come from the reputational damage to America's creditworthiness, which would be caused most directly by a failure to make interest payments to debt holders on time. The most disastrous political consequences would come from the specter of seniors who depend on their Social Security checks finding themselves scrambling to keep the lights on.
Republicans thus have a proposal: they will remove the possibility of missed debt payments or Social Security checks. Their vehicle for this change is the very simple Default Prevention Act (H.R. 692), which the House Ways and Means Committee recently advanced. The 377-word bill would put two holes in the debt ceiling for a cash-strapped Treasury to pop its head through in an emergency, one for debt service and one for Social Security. The statutory debt limit would still remain at the same number, but the Treasury could issue debt for these purposes that would effectively not count against that limit. This would essentially be a partial rolling back of the debt limit; two of the most important areas of Treasury operations would now be subject to an alternative system of congressional control involving extra congressional oversight (the bill has heightened reporting requirements for any debt issued in this way) instead of the debt ceiling.
Republicans are eager to tout the merits of their proposal. Committee Chairman Paul Ryan (R-WI) emphasizes what a big confidence boost the economy would get from “tak[ing] default off the table,” and his committee has a shiny new page entitled, “Default? Not on our watch.” By their lights, this bill is a pure process improvement, ensuring that commitments are met but without “raising the debt limit.” Any future debt ceiling showdowns will be less hazardous than those of the recent past. What's not to like?
A lot, say Democrats, all of whom voted against the bill in the Ways and Means Committee. Ranking Member Sander Levin (D-MI) offers a quick rebuttal entitled, “Experts agree: Prioritization is 'default by another name.'” (That quotation comes from a not altogether disinterested party, Secretary of the Treasury Jack Lew.) Law Professor Neil Buchanan, author of a very useful exploration of the recent debt ceiling fights, is apoplectic, headlining his reaction, “House Republicans' Deep Cynicism: Pay the Rich and Play Politics With Everyone Else.” Why are they so against this limited de-limiting of the debt?
Rather than this bill in particular, much of their ire is directed more generally against “prioritization,” which is the idea that an inability to expand the debt would force government to make some payments rather than others from its cash flow (which is somewhat erratic on a day to day basis). Many Republicans who have downplayed the risks from the debt ceiling fights have claimed that prioritization always existed as an option to ensure that vital payments could be made on time, even without any legal changes. Democrats and the Treasury Department are right to vigorously contest these assertions: logistically, prioritization would be a dicey proposition; legally, it has no basis and would thus be (or at least seem) deeply ...
Yes. And that might mean no. It's complicated, and caught up in an intense ongoing partisan struggle, which makes it difficult for anyone to analyze dispassionately. But let's give it a try.
Everyone is so concerned about our recent habit of ...

Yes. And that might mean no. It’s complicated, and caught up in an intense ongoing partisan struggle, which makes it difficult for anyone to analyze dispassionately. But let’s give it a try.

Everyone is so concerned about our recent habit of debt ceiling standoffs between Congress and the President because if these tense negotiations fail to raise the statutory debt limit by the time Treasury’s ability to manipulate its accounts runs out—a result that neither side desires—it would mean that the United States would be unable to make timely payments on its debt service, to its many employees and contractors, or to the millions of Americans who depend on transfers of various sorts. The most disastrous economic consequences would come from the reputational damage to America’s creditworthiness, which would be caused most directly by a failure to make interest payments to debt holders on time. The most disastrous political consequences would come from the specter of seniors who depend on their Social Security checks finding themselves scrambling to keep the lights on.

Republicans thus have a proposal: they will remove the possibility of missed debt payments or Social Security checks. Their vehicle for this change is the very simple Default Prevention Act (H.R. 692), which the House Ways and Means Committee recently advanced. The 377-word bill would put two holes in the debt ceiling for a cash-strapped Treasury to pop its head through in an emergency, one for debt service and one for Social Security. The statutory debt limit would still remain at the same number, but the Treasury could issue debt for these purposes that would effectively not count against that limit. This would essentially be a partial rolling back of the debt limit; two of the most important areas of Treasury operations would now be subject to an alternative system of congressional control involving extra congressional oversight (the bill has heightened reporting requirements for any debt issued in this way) instead of the debt ceiling.

Republicans are eager to tout the merits of their proposal. Committee Chairman Paul Ryan (R-WI) emphasizes what a big confidence boost the economy would get from “tak[ing] default off the table,” and his committee has a shiny new page entitled, “Default? Not on our watch.” By their lights, this bill is a pure process improvement, ensuring that commitments are met but without “raising the debt limit.” Any future debt ceiling showdowns will be less hazardous than those of the recent past. What’s not to like?

A lot, say Democrats, all of whom voted against the bill in the Ways and Means Committee. Ranking Member Sander Levin (D-MI) offers a quick rebuttal entitled, “Experts agree: Prioritization is ‘default by another name.’” (That quotation comes from a not altogether disinterested party, Secretary of the Treasury Jack Lew.) Law Professor Neil Buchanan, author of a very useful exploration of the recent debt ceiling fights, is apoplectic, headlining his reaction, “House Republicans’ Deep Cynicism: Pay the Rich and Play Politics With Everyone Else.” Why are they so against this limited de-limiting of the debt?

Rather than this bill in particular, much of their ire is directed more generally against “prioritization,” which is the idea that an inability to expand the debt would force government to make some payments rather than others from its cash flow (which is somewhat erratic on a day to day basis). Many Republicans who have downplayed the risks from the debt ceiling fights have claimed that prioritization always existed as an option to ensure that vital payments could be made on time, even without any legal changes. Democrats and the Treasury Department are right to vigorously contest these assertions: logistically, prioritization would be a dicey proposition; legally, it has no basis and would thus be (or at least seem) deeply arbitrary; constitutionally, it is a monstrosity for Congress to pass a set of mutually inconsistent laws and then expect the President to just sort it all out somehow. To the extent that the Default Prevention Act codifies the idea of prioritization, then, it seems like a bad idea.

That line of argumentation is mostly incoherent. By changing the existing statutory framework, the Default Prevention Act would allow—indeed, codify—prioritization, thus removing the thorniest legal and constitutional difficulties when it comes to debt and Social Security payments. The feasibility of making debt and Social Security payments in full and on time while other payments are withheld could be addressed, not instantaneously, and perhaps not in time for this year’s crisis, but certainly before too long. It’s not as if it is logically impossible to separate these things out, just that configuring government computer systems can’t and won’t happen right in the moment of a crisis. But changing the law could set a system change into motion well in advance.

True, because the Default Prevention Act addresses only debt and Social Security payments, it would not resolve the difficult questions about what else ought to be paid for, and when, out of the government’s cash flows. To that extent the improvement it offers is a limited one, and I have argued we would be far better off if we did away with the debt ceiling altogether. But why should a limited improvement should be so offensive?

The answer is that Democrats fear that a less scary debt ceiling breakdown will be a more likely debt ceiling breakdown, with Republicans far more willing than before to hold firm in their demands attached to debt ceiling increases. Several Democratic members voiced fears that once Republicans have planted the “no default” flag, they will be ready to hurl themselves into a debt ceiling fight with renewed fervor, rather than moderating the logic of the hardline anti-spending wing of their party.

And then Democrats say that the point where we’d end up, in which debt service and Social Security recipients are able to go on as normal but everything else is still thrown into chaos, would be just “default by another name,” and we would in fact be no better off for having the Default Prevention Act in place. That strikes me as bluster. Debt market participants are mostly sophisticated (indeed, this is the basis for the rather overwrought cry that Republicans are out to ensure that “China and rich people” get paid first) and if they saw their future interest payments as no longer subject to any debt ceiling, it is hard to understand why they would think those payments were less certain to be made on time, regardless of how badly other things were going.

Even if these claims that everything would be just as bad even if debt payments got made are dubious, Democrats’ broader case makes plenty of sense given their concerns. The President is actually extremely advantaged in any debt ceiling standoff under the current “pass or total disaster” status quo; presumably that advantage would shrink if we move to a “pass or mostly disaster” regime. And maybe negotiations would be more likely to go off the rails with the reform in place, with consequences that would be plenty damaging enough to millions of normal Americans and to America’s reputation as a reliable partner.

Does that worry justify opposing a partial, imperfect reform of the debt ceiling? I wonder if anyone stands sufficiently aloof from the dynamics of the partisan budget fights to give an answer untainted by strategic considerations. For my part a world with the Default Prevention Act passed into law would not strike me as a much scarier place. Probably President Obama’s veto pen means that the symbolic rhetoric flying back and forth is more important than the substantive policy questions for now.

Authors

]]>
http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults?rssid=debt+debate{181225B1-84B8-4089-B838-A10D60538C9B}http://webfeeds.brookings.edu/~/111455378/0/brookingsrss/topics/debtdebate~A-crisis-in-student-loans-How-changes-in-the-characteristics-of-borrowers-and-in-the-institutions-they-attended-contributed-to-rising-loan-defaultsA crisis in student loans? How changes in the characteristics of borrowers and in the institutions they attended contributed to rising loan defaults

The Facts Behind the Student Debt ‘Crisis’

MEDIA SUMMARY

Students loan debt a selective crisis; Majority of recent borrowers and defaulters attend for-profit and non-selective schoolsNon-traditional borrowers defaulting explains the doubling of default rates over past decade; debt increases much larger than for graduate borrowers
Future debt and default load may improve, thanks to end of the recession and crack down on for-profits

The so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans. In contrast, most borrowers at four-year public and private non-profit institutions have relatively low rates of default, solid earnings, and steady employment rates.

With outstanding federal student loan balances in the U.S. exceeding $1.1 trillion -- quadrupling over the last 12 years and more than any other type of household debt except mortgages – the research finds that most of the increase in default is because of an upsurge in the number of borrowers attending for-profit schools and, to a lesser-extent, community colleges and other non-selective institutions whose students had historically composed only a small share of student borrowing. By 2011, however, borrowers at for-profit and 2-year institutions represented almost half of student-loan borrowers leaving school and starting to repay loans, and accounted for 70 percent of student loan defaults. In 2000, only 1 of the top 25 schools whose students owed the most federal debt was a for-profit institution, whereas in 2014, 13 were. Borrowers from those 13 schools owed about $109 billion—almost 10 percent of all federal student loans.

In “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and the Institutions they Attend Contributed to Rising Loan Defaults,” Adam Looney of the U.S. Department of the Treasury and Stanford’s Constantine Yannelis examine the rise in student loan delinquency and default, drawing on newly available U.S. Department of Education administrative data on federal student borrowing linked to earnings records derived from tax records. The sample includes 4 percent of all federal student borrowers since 1970—about 46 million annual updates on 4 million borrowers derived from hundreds of millions of individual records—and provides information on the characteristics of students, the institutions they attended, how much they borrowed, and how they fared after entering the job market.

Increased enrollment in for-profit schools and increased borrowing rates among community college students account for much of the recent doubling in default rates, with changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers explaining the change, Looney and Yannelis find. “[These students] borrowed substantial amounts to attend institutions with low completion rates and, after enrollment, experienced poor labor market outcomes that made their debt burdens difficult to sustain” they write. More than 25 percent of them leaving school during or soon after the recession would default on their loans within three years.

For example, the median borrower from a for-profit institution who left school in 2011 and found a job in 2013 earned about $20,900—but over one in five (21 percent) were not employed; comparable community college borrowers earned $23,900 and almost one in six (17 percent) were not employed. At the same time, the median loan balances of non-traditional borrowers had jumped almost 40 percent (from $7,500 to $10,500) for for-profit borrowers and about 35 percent (from $7,100 to $9,600) among 2-year borrowers – driven by greater financial aid eligibility and need, higher loan limits, cuts to state aid, the impact of recession on household finances, and increased tuition costs. These debt increases were much larger among non-traditional borrowers than for borrowers from 4-year public and private institutions, or for graduate borrowers.

In other words, what type of institution students attend matters: default rates have remained low for borrowers at most 4-year public and private non-profit institutions, despite the severe recession and relatively high loan balances, the authors find. These students’ generally high earnings, low unemployment rates, and greater family resources appear to have enabled them to avoid loan repayment problems even during tough economic times.

“Rising default rates among non-traditional borrowers could be overshadowing relatively beneficial investments in higher education, which may be less worrisome or even desirable,” they note.

Looney and Yannelis note loan delinquency is likely to drop in the future, although with a lag of several years, thanks to several factors including a steep drop in the number of new borrowers at for-profit and 2-year institutions as economic conditions improved, and as oversight of for-profit institutions has been strengthened. Additionally, expanded eligibility and enrollment in income-based repayment, such as the Pay-As-You-Earn (PAYE) plan, which allows borrowers to suspend or make reduced payments when their income falls.

Despite these improvements, however, many features of the federal loan system that contributed to today’s problems persist, they add. For instance, institutions whose students face weak economic outcomes and poor loan performance are largely insulated from any financial or other? consequences; certain borrowers may borrow very large amounts—often limited only by costs of attendance—contributing to increased risks and part of the reason for rising tuition costs; and many insolvent, largely non-traditional borrowers are mired in a system where they are unlikely to have the resources to repay their loans in full, and yet generally have no way to have those loans discharged.

Video

Authors

Adam Looney

Constantine Yannelis

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Thu, 10 Sep 2015 13:00:00 -0400Adam Looney and Constantine Yannelis
The Facts Behind the Student Debt ‘Crisis’
MEDIA SUMMARY
Students loan debt a selective crisis; Majority of recent borrowers and defaulters attend for-profit and non-selective schools
Non-traditional borrowers defaulting explains the doubling of default rates over past decade; debt increases much larger than for graduate borrowers
Future debt and default load may improve, thanks to end of the recession and crack down on for-profits
The so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans. In contrast, most borrowers at four-year public and private non-profit institutions have relatively low rates of default, solid earnings, and steady employment rates.
With outstanding federal student loan balances in the U.S. exceeding $1.1 trillion -- quadrupling over the last 12 years and more than any other type of household debt except mortgages – the research finds that most of the increase in default is because of an upsurge in the number of borrowers attending for-profit schools and, to a lesser-extent, community colleges and other non-selective institutions whose students had historically composed only a small share of student borrowing. By 2011, however, borrowers at for-profit and 2-year institutions represented almost half of student-loan borrowers leaving school and starting to repay loans, and accounted for 70 percent of student loan defaults. In 2000, only 1 of the top 25 schools whose students owed the most federal debt was a for-profit institution, whereas in 2014, 13 were. Borrowers from those 13 schools owed about $109 billion—almost 10 percent of all federal student loans.
View the full infographic
In “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and the Institutions they Attend Contributed to Rising Loan Defaults,” Adam Looney of the U.S. Department of the Treasury and Stanford’s Constantine Yannelis examine the rise in student loan delinquency and default, drawing on newly available U.S. Department of Education administrative data on federal student borrowing linked to earnings records derived from tax records. The sample includes 4 percent of all federal student borrowers since 1970—about 46 million annual updates on 4 million borrowers derived from hundreds of millions of individual records—and provides information on the characteristics of students, the institutions they attended, how much they borrowed, and how they fared after entering the job market.
Increased enrollment in for-profit schools and increased borrowing rates among community college students account for much of the recent doubling in default rates, with changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers explaining the change, Looney and Yannelis find. “[These students] borrowed substantial amounts to attend institutions with low completion rates and, after enrollment, experienced poor labor market outcomes that made their debt burdens difficult to sustain” they write. More than 25 percent of them leaving school during or soon after the recession would default on their loans within three years.
For example, the median borrower from a for-profit institution who left school in 2011 and found a job in 2013 earned about $20,900—but over one in five (21 percent) were not employed; comparable community college borrowers earned $23,900 and almost one in six (17 percent) were not employed. At the same time, the median loan balances of non-traditional borrowers had jumped almost 40 percent (from $7,500 to $10,500) for for-profit borrowers and about 35 percent (from $7,100 to $9,600) among 2-year borrowers – driven by greater financial ... The Facts Behind the Student Debt ‘Crisis’
MEDIA SUMMARY
Students loan debt a selective crisis; Majority of recent borrowers and defaulters attend for-profit and non-selective schools
Non-traditional borrowers defaulting explains ...

The Facts Behind the Student Debt ‘Crisis’

MEDIA SUMMARY

Students loan debt a selective crisis; Majority of recent borrowers and defaulters attend for-profit and non-selective schoolsNon-traditional borrowers defaulting explains the doubling of default rates over past decade; debt increases much larger than for graduate borrowers
Future debt and default load may improve, thanks to end of the recession and crack down on for-profits

The so-called student loan crisis in the U.S. is largely concentrated among non-traditional borrowers attending for-profit schools and other non-selective institutions, who have relatively weak educational outcomes and difficulty finding jobs after starting to repay their loans. In contrast, most borrowers at four-year public and private non-profit institutions have relatively low rates of default, solid earnings, and steady employment rates.

With outstanding federal student loan balances in the U.S. exceeding $1.1 trillion -- quadrupling over the last 12 years and more than any other type of household debt except mortgages – the research finds that most of the increase in default is because of an upsurge in the number of borrowers attending for-profit schools and, to a lesser-extent, community colleges and other non-selective institutions whose students had historically composed only a small share of student borrowing. By 2011, however, borrowers at for-profit and 2-year institutions represented almost half of student-loan borrowers leaving school and starting to repay loans, and accounted for 70 percent of student loan defaults. In 2000, only 1 of the top 25 schools whose students owed the most federal debt was a for-profit institution, whereas in 2014, 13 were. Borrowers from those 13 schools owed about $109 billion—almost 10 percent of all federal student loans.

In “A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and the Institutions they Attend Contributed to Rising Loan Defaults,” Adam Looney of the U.S. Department of the Treasury and Stanford’s Constantine Yannelis examine the rise in student loan delinquency and default, drawing on newly available U.S. Department of Education administrative data on federal student borrowing linked to earnings records derived from tax records. The sample includes 4 percent of all federal student borrowers since 1970—about 46 million annual updates on 4 million borrowers derived from hundreds of millions of individual records—and provides information on the characteristics of students, the institutions they attended, how much they borrowed, and how they fared after entering the job market.

Increased enrollment in for-profit schools and increased borrowing rates among community college students account for much of the recent doubling in default rates, with changes in the type of schools attended, debt burdens, and labor market outcomes of non-traditional borrowers explaining the change, Looney and Yannelis find. “[These students] borrowed substantial amounts to attend institutions with low completion rates and, after enrollment, experienced poor labor market outcomes that made their debt burdens difficult to sustain” they write. More than 25 percent of them leaving school during or soon after the recession would default on their loans within three years.

For example, the median borrower from a for-profit institution who left school in 2011 and found a job in 2013 earned about $20,900—but over one in five (21 percent) were not employed; comparable community college borrowers earned $23,900 and almost one in six (17 percent) were not employed. At the same time, the median loan balances of non-traditional borrowers had jumped almost 40 percent (from $7,500 to $10,500) for for-profit borrowers and about 35 percent (from $7,100 to $9,600) among 2-year borrowers – driven by greater financial aid eligibility and need, higher loan limits, cuts to state aid, the impact of recession on household finances, and increased tuition costs. These debt increases were much larger among non-traditional borrowers than for borrowers from 4-year public and private institutions, or for graduate borrowers.

In other words, what type of institution students attend matters: default rates have remained low for borrowers at most 4-year public and private non-profit institutions, despite the severe recession and relatively high loan balances, the authors find. These students’ generally high earnings, low unemployment rates, and greater family resources appear to have enabled them to avoid loan repayment problems even during tough economic times.

“Rising default rates among non-traditional borrowers could be overshadowing relatively beneficial investments in higher education, which may be less worrisome or even desirable,” they note.

Looney and Yannelis note loan delinquency is likely to drop in the future, although with a lag of several years, thanks to several factors including a steep drop in the number of new borrowers at for-profit and 2-year institutions as economic conditions improved, and as oversight of for-profit institutions has been strengthened. Additionally, expanded eligibility and enrollment in income-based repayment, such as the Pay-As-You-Earn (PAYE) plan, which allows borrowers to suspend or make reduced payments when their income falls.

Despite these improvements, however, many features of the federal loan system that contributed to today’s problems persist, they add. For instance, institutions whose students face weak economic outcomes and poor loan performance are largely insulated from any financial or other? consequences; certain borrowers may borrow very large amounts—often limited only by costs of attendance—contributing to increased risks and part of the reason for rising tuition costs; and many insolvent, largely non-traditional borrowers are mired in a system where they are unlikely to have the resources to repay their loans in full, and yet generally have no way to have those loans discharged.

The eurozone has three problems: national debt obligations that cannot be met, medium-term imbalances in trade competitiveness, and long-term structural flaws.

The short-run problem requires more of the monetary easing that Germany has, with appalling shortsightedness, been resisting, and less of the near-term fiscal restraint that Germany has, with equally appalling shortsightedness, been seeking. To insist that Greece meet all of its near-term current debt service obligations makes about as much sense as did French and British insistence that Germany honor its reparations obligations after World War I. The latter could not be and were not honored. The former cannot and will not be honored either.

The medium-term problem is that, given a single currency, labor costs are too high in Greece and too low in Germany and some other northern European countries. Because adjustments in currency values cannot correct these imbalances, differences in growth of wages must do the job—either wage deflation and continued depression in Greece and other peripheral countries, wage inflation in Germany, or both. The former is a recipe for intense and sustained misery. The latter, however politically improbable it may now seem, is the better alternative.

The long-term problem is that the eurozone lacks the fiscal transfer mechanisms necessary to soften the effects of competitiveness imbalances while other forms of adjustment take effect. This lack places extraordinary demands on the willingness of individual nations to undertake internal policies to reduce such imbalances. Until such fiscal transfer mechanisms are created, crises such as the current one are bound to recur.

Present circumstances call for a combination of short-term expansionary policies that have to be led or accepted by the surplus nations, notably Germany, who will also have to recognize and accept that not all Greek debts will be paid or that debt service payments will not be made on time and at originally negotiated interest rates. The price for those concessions will be a current and credible commitment eventually to restore and maintain fiscal balance by the peripheral countries, notably Greece.

The eurozone has three problems: national debt obligations that cannot be met, medium-term imbalances in trade competitiveness, and long-term structural flaws.

The short-run problem requires more of the monetary easing that Germany has, with appalling shortsightedness, been resisting, and less of the near-term fiscal restraint that Germany has, with equally appalling shortsightedness, been seeking. To insist that Greece meet all of its near-term current debt service obligations makes about as much sense as did French and British insistence that Germany honor its reparations obligations after World War I. The latter could not be and were not honored. The former cannot and will not be honored either.

The medium-term problem is that, given a single currency, labor costs are too high in Greece and too low in Germany and some other northern European countries. Because adjustments in currency values cannot correct these imbalances, differences in growth of wages must do the job—either wage deflation and continued depression in Greece and other peripheral countries, wage inflation in Germany, or both. The former is a recipe for intense and sustained misery. The latter, however politically improbable it may now seem, is the better alternative.

The long-term problem is that the eurozone lacks the fiscal transfer mechanisms necessary to soften the effects of competitiveness imbalances while other forms of adjustment take effect. This lack places extraordinary demands on the willingness of individual nations to undertake internal policies to reduce such imbalances. Until such fiscal transfer mechanisms are created, crises such as the current one are bound to recur.

Present circumstances call for a combination of short-term expansionary policies that have to be led or accepted by the surplus nations, notably Germany, who will also have to recognize and accept that not all Greek debts will be paid or that debt service payments will not be made on time and at originally negotiated interest rates. The price for those concessions will be a current and credible commitment eventually to restore and maintain fiscal balance by the peripheral countries, notably Greece.

The U.S. Department of Education is opening what could be a very large (and, for taxpayers, expensive) door to debt relief. As the department ponders its standard for forgiving loans, potentially tens of thousands of borrowers could seek relief from repaying tens of billions of dollars in debt.

Student loans are a high-profile issue. Many borrowers have compelling stories: They borrowed to attend classes that didn't pay off in terms of jobs or higher wages and are stuck with loans that can't be discharged in bankruptcy. For-profit colleges account for a disproportionate share of loan defaults. Several Democrats in Congress–Sen. Elizabeth Warren (Mass.) among them–are pushing the administration to use a federal regulatory provision to forgive lots of loans. Other lawmakers, many of them Republican, see this as another unwarranted Obama administration assault on the for-profit college industry.

So far, blanket debt relief has been offered only to students at affiliates of Corinthian Colleges Inc., a large for-profit chain that filed last month for bankruptcy-court protection. About 15,000 Corinthian students with a combined $200 million in loans who were attending schools that were closed are eligible for debt relief under a well-understood federal loan provision that covers shuttered schools.

But there's a long-ignored federal regulation, known as "defense to repayment," that allows borrowers to seek loan forgiveness in the case of "any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable state law," such as bans on unfair and deceptive practices. Until recently, this clause had been invoked only five times–ever.

Citing that regulation, the Education Department is offering debt forgiveness to students who enrolled in programs at Corinthian's Heald College for which the school, according to the government, published grossly misleading job-placement rates. About 50,000 Heald students borrowed $680 million; most were in programs for which misleading data were posted and thus are eligible for debt forgiveness.

There could be a lot of other institutions. At least 28 colleges, mostly for-profit, are under investigation, according to their Securities and Exchange Commission filings or to state and local government authorities.

Tabulating data from the Education Department's public database, Hutchins Center finds that students who attended those 28 colleges have borrowed more than $57 billion between school year 2009-10 and the first nine months of 2014-15. Even in Washington, that's a lot of money.

To be clear: An investigation doesn't mean that a school has been found to have done anything wrong. And even if the Education Department concludes that there has been wrongdoing, not every student at that school would be eligible for debt relief, and not every eligible student would seek relief. Also, Education Department regulations allow the government to go after the colleges for the money (if the colleges have any left).

Here are the 28 schools with links to their SEC filings or other information on local, state or federal investigations.

* An individual may have more than one loan
** New York City Department of Consumer Affairs confirms it has subpoenaed these colleges
***Anamarc College closed in June 2014Source: Brookings Institution’s Hutchins Center on Fiscal & Monetary Policy analysis of Title IV Program Volume Reports from 2009-10 through third quarter of 2014-15.

The "defense to repayment" regulation gives the department substantial flexibility: It doesn't have to wait for a state to determine that a college broke the law to waive a student's loans. Among the special master's jobs will be to recommend an evidentiary standard for considering students' requests, recognizing that the first few cases will inevitably set precedents. The more generous the reading of the regulation, the more borrowers likely to seek relief.

Forgiving student loans in this fashion doesn't require an act of Congress or formal approval from the Treasury or the Office of Management and Budget–even if forgiveness means that future government receipts will be lower and budget deficits larger than projected. The Education Department has no reliable way of estimating the cost of its actions because there is so little history to go by. Earlier this year, the president’s budget disclosed that past Obama administration student-loan debt-relief initiatives reduced projected repayments by $21.8 billion.

All this involves past borrowing. Meanwhile, the Obama administration is running into congressional resistance to its proposals to tighten regulation of higher education going forward, with some accusing the administration of regulatory overreach. A spending bill unveiled in the House Appropriations Committee this week, for instance, would block the Education Department from moving forward with proposed rules.

"We're going to continue to try to do the right thing for students and taxpayers," Secretary Duncan has said. "But hopefully Congress will wake up here and get members on both sides of the aisle, and figure out that they need to strengthen our hand in dealing with these guys."

Authors

]]>
Thu, 18 Jun 2015 11:15:00 -0400David Wessel
A version of this post appeared on WSJ.com.
The U.S. Department of Education is opening what could be a very large (and, for taxpayers, expensive) door to debt relief. As the department ponders its standard for forgiving loans, potentially tens of thousands of borrowers could seek relief from repaying tens of billions of dollars in debt.
Student loans are a high-profile issue. Many borrowers have compelling stories: They borrowed to attend classes that didn't pay off in terms of jobs or higher wages and are stuck with loans that can't be discharged in bankruptcy. For-profit colleges account for a disproportionate share of loan defaults. Several Democrats in Congress–Sen. Elizabeth Warren (Mass.) among them–are pushing the administration to use a federal regulatory provision to forgive lots of loans. Other lawmakers, many of them Republican, see this as another unwarranted Obama administration assault on the for-profit college industry.
So far, blanket debt relief has been offered only to students at affiliates of Corinthian Colleges Inc., a large for-profit chain that filed last month for bankruptcy-court protection. About 15,000 Corinthian students with a combined $200 million in loans who were attending schools that were closed are eligible for debt relief under a well-understood federal loan provision that covers shuttered schools.
But there's a long-ignored federal regulation, known as "defense to repayment," that allows borrowers to seek loan forgiveness in the case of "any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable state law," such as bans on unfair and deceptive practices. Until recently, this clause had been invoked only five times–ever.
Citing that regulation, the Education Department is offering debt forgiveness to students who enrolled in programs at Corinthian's Heald College for which the school, according to the government, published grossly misleading job-placement rates. About 50,000 Heald students borrowed $680 million; most were in programs for which misleading data were posted and thus are eligible for debt forgiveness.
But the Education Department isn't stopping at Corinthian–and that's where the numbers could get big. "If you've been defrauded by a school, we'll make sure that you get every penny of the debt relief you are entitled to through a streamlined process," Education Secretary Arne Duncan said in a recent call with reporters. The department plans to name a special master to "help develop a broader system that will support students at other institutions who believe they have a defense to repayment."
There could be a lot of other institutions. At least 28 colleges, mostly for-profit, are under investigation, according to their Securities and Exchange Commission filings or to state and local government authorities.
Tabulating data from the Education Department's public database, Hutchins Center finds that students who attended those 28 colleges have borrowed more than $57 billion between school year 2009-10 and the first nine months of 2014-15. Even in Washington, that's a lot of money.
To be clear: An investigation doesn't mean that a school has been found to have done anything wrong. And even if the Education Department concludes that there has been wrongdoing, not every student at that school would be eligible for debt relief, and not every eligible student would seek relief. Also, Education Department regulations allow the government to go after the colleges for the money (if the colleges have any left).
Here are the 28 schools with links to their SEC filings or other information on local, state or federal investigations.
Name
Loans Made ($)
Total Number Loans*
Apollo Education
14,600,000,000
6,053,570
EDMC
8,580,000,000
4,386,035
DeVry
6,970,000,000
4,277,682
CEC ...
A version of this post appeared on WSJ.com.
The U.S. Department of Education is opening what could be a very large (and, for taxpayers, expensive) door to debt relief. As the department ponders its standard for forgiving loans, potentially tens ...

The U.S. Department of Education is opening what could be a very large (and, for taxpayers, expensive) door to debt relief. As the department ponders its standard for forgiving loans, potentially tens of thousands of borrowers could seek relief from repaying tens of billions of dollars in debt.

Student loans are a high-profile issue. Many borrowers have compelling stories: They borrowed to attend classes that didn't pay off in terms of jobs or higher wages and are stuck with loans that can't be discharged in bankruptcy. For-profit colleges account for a disproportionate share of loan defaults. Several Democrats in Congress–Sen. Elizabeth Warren (Mass.) among them–are pushing the administration to use a federal regulatory provision to forgive lots of loans. Other lawmakers, many of them Republican, see this as another unwarranted Obama administration assault on the for-profit college industry.

So far, blanket debt relief has been offered only to students at affiliates of Corinthian Colleges Inc., a large for-profit chain that filed last month for bankruptcy-court protection. About 15,000 Corinthian students with a combined $200 million in loans who were attending schools that were closed are eligible for debt relief under a well-understood federal loan provision that covers shuttered schools.

But there's a long-ignored federal regulation, known as "defense to repayment," that allows borrowers to seek loan forgiveness in the case of "any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable state law," such as bans on unfair and deceptive practices. Until recently, this clause had been invoked only five times–ever.

Citing that regulation, the Education Department is offering debt forgiveness to students who enrolled in programs at Corinthian's Heald College for which the school, according to the government, published grossly misleading job-placement rates. About 50,000 Heald students borrowed $680 million; most were in programs for which misleading data were posted and thus are eligible for debt forgiveness.

There could be a lot of other institutions. At least 28 colleges, mostly for-profit, are under investigation, according to their Securities and Exchange Commission filings or to state and local government authorities.

Tabulating data from the Education Department's public database, Hutchins Center finds that students who attended those 28 colleges have borrowed more than $57 billion between school year 2009-10 and the first nine months of 2014-15. Even in Washington, that's a lot of money.

To be clear: An investigation doesn't mean that a school has been found to have done anything wrong. And even if the Education Department concludes that there has been wrongdoing, not every student at that school would be eligible for debt relief, and not every eligible student would seek relief. Also, Education Department regulations allow the government to go after the colleges for the money (if the colleges have any left).

Here are the 28 schools with links to their SEC filings or other information on local, state or federal investigations.

* An individual may have more than one loan
** New York City Department of Consumer Affairs confirms it has subpoenaed these colleges
***Anamarc College closed in June 2014
Source: Brookings Institution’s Hutchins Center on Fiscal & Monetary Policy analysis of Title IV Program Volume Reports from 2009-10 through third quarter of 2014-15.

The "defense to repayment" regulation gives the department substantial flexibility: It doesn't have to wait for a state to determine that a college broke the law to waive a student's loans. Among the special master's jobs will be to recommend an evidentiary standard for considering students' requests, recognizing that the first few cases will inevitably set precedents. The more generous the reading of the regulation, the more borrowers likely to seek relief.

Forgiving student loans in this fashion doesn't require an act of Congress or formal approval from the Treasury or the Office of Management and Budget–even if forgiveness means that future government receipts will be lower and budget deficits larger than projected. The Education Department has no reliable way of estimating the cost of its actions because there is so little history to go by. Earlier this year, the president’s budget disclosed that past Obama administration student-loan debt-relief initiatives reduced projected repayments by $21.8 billion.

All this involves past borrowing. Meanwhile, the Obama administration is running into congressional resistance to its proposals to tighten regulation of higher education going forward, with some accusing the administration of regulatory overreach. A spending bill unveiled in the House Appropriations Committee this week, for instance, would block the Education Department from moving forward with proposed rules.

"We're going to continue to try to do the right thing for students and taxpayers," Secretary Duncan has said. "But hopefully Congress will wake up here and get members on both sides of the aisle, and figure out that they need to strengthen our hand in dealing with these guys."

International Monetary Fund staff economists have stimulated a much-needed discussion (at least on Think Tank) of the best approach governments of strong economies such as the U.S. and Germany should take to their debt burdens. "[T]he mantra that it is always desirable to reduce public debt must not go unquestioned," they write.

Their paper is something of a Rorschach test: Everyone seems to read into it something different.

I read it as a challenge to those who argue that the highest priority of the U.S. government (and 2016 presidential candidates) ought to be taking action today to reduce the historically large debt-to-gross domestic product burden before it's too late. I was thinking about folks who fixate on the national debt clock, who argue for cutting spending now (can you say "sequester"?), and who reason that the economy is growing slowly, in part, because uncertainty over future deficits is discouraging business investment and hiring.

Salim Furth of the Heritage Foundation read it as an endorsement of European and U.S. fiscal policy because governments have, in fact, done pretty much what the IMF prescribed: Narrowed the deficit but not paid down the debt. Perhaps, but the criticism seemed to me to be aimed at those who think the Obama administration has been irresponsibly profligate and who applaud Germany for fiscal rectitude. (For another view on Europe, see Nobel laureate Amartya Sen' s recent "The Economic Consequences of Austerity".)

Maya MacGuineas of the Committee for a Responsible Federal Budget found support for (self-described) deficit hawks, saying that most are "not talking about paying down the debt but calling for sensible deficit reduction that slows the growth of the federal debt to give the economy time to catch up." That's good to know, but there are some deficit hawks out there warning of imminent catastrophe because the federal debt has doubled as a percentage of gross domestic product on President Barack Obama's watch and who are blocking any increased public-investment spending in Congress.

Now, I'm not completely convinced by the IMF argument. We learned during the recent crisis that the federal debt can grow by 40 percentage points of GDP in a half-dozen years. At today's debt levels, could the U.S. repeat that if another disaster (financial or military) struck?

You can read the IMF paper or a blog post summary for yourself. It's clear to me that they are trying to provide intellectual ammunition to those (like Mr. Sen) who argue that spurring economic growth ought to be at least as high on the policy priority list, if not higher, for the U.S., Germany, and similarly situated economies than worrying about the size of their government debts.

Authors

]]>
Mon, 08 Jun 2015 08:30:00 -0400David Wessel
Editor's note: This post originally appeared in the Wall Street Journal Think Tank blog on June 8, 2015.
International Monetary Fund staff economists have stimulated a much-needed discussion (at least on Think Tank) of the best approach governments of strong economies such as the U.S. and Germany should take to their debt burdens. "[T]he mantra that it is always desirable to reduce public debt must not go unquestioned," they write.
Their paper is something of a Rorschach test: Everyone seems to read into it something different.
I read it as a challenge to those who argue that the highest priority of the U.S. government (and 2016 presidential candidates) ought to be taking action today to reduce the historically large debt-to-gross domestic product burden before it's too late. I was thinking about folks who fixate on the national debt clock, who argue for cutting spending now (can you say "sequester"?), and who reason that the economy is growing slowly, in part, because uncertainty over future deficits is discouraging business investment and hiring.
Salim Furth of the Heritage Foundation read it as an endorsement of European and U.S. fiscal policy because governments have, in fact, done pretty much what the IMF prescribed: Narrowed the deficit but not paid down the debt. Perhaps, but the criticism seemed to me to be aimed at those who think the Obama administration has been irresponsibly profligate and who applaud Germany for fiscal rectitude. (For another view on Europe, see Nobel laureate Amartya Sen' s recent "The Economic Consequences of Austerity".)
Maya MacGuineas of the Committee for a Responsible Federal Budget found support for (self-described) deficit hawks, saying that most are "not talking about paying down the debt but calling for sensible deficit reduction that slows the growth of the federal debt to give the economy time to catch up." That's good to know, but there are some deficit hawks out there warning of imminent catastrophe because the federal debt has doubled as a percentage of gross domestic product on President Barack Obama's watch and who are blocking any increased public-investment spending in Congress.
Now, I'm not completely convinced by the IMF argument. We learned during the recent crisis that the federal debt can grow by 40 percentage points of GDP in a half-dozen years. At today's debt levels, could the U.S. repeat that if another disaster (financial or military) struck?
You can read the IMF paper or a blog post summary for yourself. It's clear to me that they are trying to provide intellectual ammunition to those (like Mr. Sen) who argue that spurring economic growth ought to be at least as high on the policy priority list, if not higher, for the U.S., Germany, and similarly situated economies than worrying about the size of their government debts.
Authors
- David Wessel
Publication: Wall Street Journal
Editor's note: This post originally appeared in the Wall Street Journal Think Tank blog on June 8, 2015.
International Monetary Fund staff economists have stimulated a much-needed discussion (at least on Think Tank) of the best approach ...

International Monetary Fund staff economists have stimulated a much-needed discussion (at least on Think Tank) of the best approach governments of strong economies such as the U.S. and Germany should take to their debt burdens. "[T]he mantra that it is always desirable to reduce public debt must not go unquestioned," they write.

Their paper is something of a Rorschach test: Everyone seems to read into it something different.

I read it as a challenge to those who argue that the highest priority of the U.S. government (and 2016 presidential candidates) ought to be taking action today to reduce the historically large debt-to-gross domestic product burden before it's too late. I was thinking about folks who fixate on the national debt clock, who argue for cutting spending now (can you say "sequester"?), and who reason that the economy is growing slowly, in part, because uncertainty over future deficits is discouraging business investment and hiring.

Salim Furth of the Heritage Foundation read it as an endorsement of European and U.S. fiscal policy because governments have, in fact, done pretty much what the IMF prescribed: Narrowed the deficit but not paid down the debt. Perhaps, but the criticism seemed to me to be aimed at those who think the Obama administration has been irresponsibly profligate and who applaud Germany for fiscal rectitude. (For another view on Europe, see Nobel laureate Amartya Sen' s recent "The Economic Consequences of Austerity".)

Maya MacGuineas of the Committee for a Responsible Federal Budget found support for (self-described) deficit hawks, saying that most are "not talking about paying down the debt but calling for sensible deficit reduction that slows the growth of the federal debt to give the economy time to catch up." That's good to know, but there are some deficit hawks out there warning of imminent catastrophe because the federal debt has doubled as a percentage of gross domestic product on President Barack Obama's watch and who are blocking any increased public-investment spending in Congress.

Now, I'm not completely convinced by the IMF argument. We learned during the recent crisis that the federal debt can grow by 40 percentage points of GDP in a half-dozen years. At today's debt levels, could the U.S. repeat that if another disaster (financial or military) struck?

You can read the IMF paper or a blog post summary for yourself. It's clear to me that they are trying to provide intellectual ammunition to those (like Mr. Sen) who argue that spurring economic growth ought to be at least as high on the policy priority list, if not higher, for the U.S., Germany, and similarly situated economies than worrying about the size of their government debts.

Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza of the International Monetary Fund argue that in countries with ample fiscal space—including the U.S., Germany, and the U.K.—governments should let the debt ratio fall through economic growth, rather than by pursuing policies directly aimed at reducing the debt. They note that "[d]istorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it."

Sam Langfield of the European Central Bank and Marco Pagano of the Università di Napoli Federico II find that financial systems dominated by the banking sector, like those in Europe, are associated with more systemic risk and lower economic growth compared to systems with larger equity and bond markets. The authors suggest that policies aimed at building stronger capital markets, paired with stronger bank regulation, would help to mitigate Europe's "bank bias."

Michael Geruso of the University of Texas at Austin and Timothy Layton of Harvard Medical School find that patients enrolled in Medicare Advantage plans, which receive payments based on enrollees' diagnoses, generate risk scores that are 6 to 16 percent higher than those of otherwise identical patients enrolled in fee-for-service Medicare plans, suggesting that Medicare Advantage plans are responding to the incentive to "upcode." Geruso and Layton estimate that this upcoding results in significant overpayments to private insurers, at a cost to the taxpayer of roughly $10 billion each year.

While it is possible that residual seasonality and temporary factors were responsible, it would be difficult, based on the data available today, to dismiss the possibility of a more significant drag on the economy than anticipated from foreign crosscurrents and the negative effects of the oil price decline, along with a more cautious U.S. consumer. This possibility argues for giving the data some more time to confirm further improvement in the labor market and firming of inflation toward our 2 percent target. But while the case for liftoff may not be immediate, it is coming into clearer view.

—Lael Brainard, Governor of the Federal Reserve Board

Authors

]]>
Thu, 04 Jun 2015 11:00:00 -0400Brendan Mochoruk and David Wessel
In countries with sufficient fiscal space, austerity is not the answer
Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza of the International Monetary Fund argue that in countries with ample fiscal space—including the U.S., Germany, and the U.K.—governments should let the debt ratio fall through economic growth, rather than by pursuing policies directly aimed at reducing the debt. They note that "[d]istorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it."
Financial systems dominated by banks are bad for stability and growth
Sam Langfield of the European Central Bank and Marco Pagano of the Università di Napoli Federico II find that financial systems dominated by the banking sector, like those in Europe, are associated with more systemic risk and lower economic growth compared to systems with larger equity and bond markets. The authors suggest that policies aimed at building stronger capital markets, paired with stronger bank regulation, would help to mitigate Europe's "bank bias."
Risk upcoding in Medicare Advantage plans is increasing public expenditures
Michael Geruso of the University of Texas at Austin and Timothy Layton of Harvard Medical School find that patients enrolled in Medicare Advantage plans, which receive payments based on enrollees' diagnoses, generate risk scores that are 6 to 16 percent higher than those of otherwise identical patients enrolled in fee-for-service Medicare plans, suggesting that Medicare Advantage plans are responding to the incentive to "upcode." Geruso and Layton estimate that this upcoding results in significant overpayments to private insurers, at a cost to the taxpayer of roughly $10 billion each year.
Chart of the week: Safety Net
Quote of the week: Given recent data, now is not the time to raise rates
While it is possible that residual seasonality and temporary factors were responsible, it would be difficult, based on the data available today, to dismiss the possibility of a more significant drag on the economy than anticipated from foreign crosscurrents and the negative effects of the oil price decline, along with a more cautious U.S. consumer. This possibility argues for giving the data some more time to confirm further improvement in the labor market and firming of inflation toward our 2 percent target. But while the case for liftoff may not be immediate, it is coming into clearer view.
—Lael Brainard, Governor of the Federal Reserve Board
Authors
- Brendan Mochoruk- David Wessel
In countries with sufficient fiscal space, austerity is not the answer
Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza of the International Monetary Fund argue that in countries with ample fiscal space—including the U.

Jonathan D. Ostry, Atish R. Ghosh, and Raphael Espinoza of the International Monetary Fund argue that in countries with ample fiscal space—including the U.S., Germany, and the U.K.—governments should let the debt ratio fall through economic growth, rather than by pursuing policies directly aimed at reducing the debt. They note that "[d]istorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it."

Sam Langfield of the European Central Bank and Marco Pagano of the Università di Napoli Federico II find that financial systems dominated by the banking sector, like those in Europe, are associated with more systemic risk and lower economic growth compared to systems with larger equity and bond markets. The authors suggest that policies aimed at building stronger capital markets, paired with stronger bank regulation, would help to mitigate Europe's "bank bias."

Michael Geruso of the University of Texas at Austin and Timothy Layton of Harvard Medical School find that patients enrolled in Medicare Advantage plans, which receive payments based on enrollees' diagnoses, generate risk scores that are 6 to 16 percent higher than those of otherwise identical patients enrolled in fee-for-service Medicare plans, suggesting that Medicare Advantage plans are responding to the incentive to "upcode." Geruso and Layton estimate that this upcoding results in significant overpayments to private insurers, at a cost to the taxpayer of roughly $10 billion each year.

While it is possible that residual seasonality and temporary factors were responsible, it would be difficult, based on the data available today, to dismiss the possibility of a more significant drag on the economy than anticipated from foreign crosscurrents and the negative effects of the oil price decline, along with a more cautious U.S. consumer. This possibility argues for giving the data some more time to confirm further improvement in the labor market and firming of inflation toward our 2 percent target. But while the case for liftoff may not be immediate, it is coming into clearer view.

We've come a long way from the days when the International Monetary Fund so often advised governments to cut their budget deficits that some joked that IMF stood for It's Mostly Fiscal. A new working paper from three IMF economists underscores just how much things have changed.

Their bottom line: The wisest course for some countries—the U.S. among them—would be to do nothing at all to reduce their debt burdens. "Distorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it," they write.

Yes, you read that right. Amid all the hand-wringing about the size of the U.S. government’s debt, some economists at the IMF are advising: Don't worry about it.

While some countries (Greece, Italy, and Japan, for instance) urgently need to reduce their high debt loads, the deputy director of the IMF's research department, Jonathan Ostry, and colleagues Atish Ghosh andRaphael Espinoza, argue that others (including the U.S., Germany, South Korea, and Australia) can and should fund themselves at today's exceptionally low interest rates and live with their debt but allow the ratio of debt to GDP to decline over time as their economies grow or revenue windfalls occur. (To be clear, that still requires some fiscal discipline to avoid big annual budget deficits that would add to the debt burden.)

To those who say that big public debts are bad for growth, the economists say: Yes, the taxes needed to service debts are bad for an economy, but it doesn't follow that paying down the debt is better. "Where countries retain ample fiscal space," they write, "the cure would seem to be worse than the disease—the taxation needed to pay down the debt will be more harmful to growth than living with the debt."

And to those who argue that living with a large debt is risky because it may preclude borrowing in a catastrophe like the global financial crisis, they say: "This argument has considerable merit" even for strong economies like the U.S. "but it is a matter of balance. Lower debt provides larger margins for unexpected contingencies, but if it comes at the cost of investment and growth, the margin may be somewhat illusory."

International Monetary Fund chart shows Moody's Analytics analysis of the distance between countries' debt limit and the debt-to-GDP ratio.

One tricky task is figuring out which countries have the luxury of treating their debt with benign neglect and which don't. As is the IMF custom these days, they've got a color-coded scheme. It shows which developed countries are so heavily indebted that they must cut their debt (pink), which have a lot of fiscal wiggle room (green) and which are in between (orange). The new working paper reproduces this chart (see above) that Moody's Analytics made based on the IMF economists' methodology.

We've come a long way from the days when the International Monetary Fund so often advised governments to cut their budget deficits that some joked that IMF stood for It's Mostly Fiscal. A new working paper from three IMF economists underscores just how much things have changed.

Their bottom line: The wisest course for some countries—the U.S. among them—would be to do nothing at all to reduce their debt burdens. "Distorting your economy to deliberately pay down the debt only adds to the burden of the debt, rather than reducing it," they write.

Yes, you read that right. Amid all the hand-wringing about the size of the U.S. government’s debt, some economists at the IMF are advising: Don't worry about it.

While some countries (Greece, Italy, and Japan, for instance) urgently need to reduce their high debt loads, the deputy director of the IMF's research department, Jonathan Ostry, and colleagues Atish Ghosh andRaphael Espinoza, argue that others (including the U.S., Germany, South Korea, and Australia) can and should fund themselves at today's exceptionally low interest rates and live with their debt but allow the ratio of debt to GDP to decline over time as their economies grow or revenue windfalls occur. (To be clear, that still requires some fiscal discipline to avoid big annual budget deficits that would add to the debt burden.)

To those who say that big public debts are bad for growth, the economists say: Yes, the taxes needed to service debts are bad for an economy, but it doesn't follow that paying down the debt is better. "Where countries retain ample fiscal space," they write, "the cure would seem to be worse than the disease—the taxation needed to pay down the debt will be more harmful to growth than living with the debt."

And to those who argue that living with a large debt is risky because it may preclude borrowing in a catastrophe like the global financial crisis, they say: "This argument has considerable merit" even for strong economies like the U.S. "but it is a matter of balance. Lower debt provides larger margins for unexpected contingencies, but if it comes at the cost of investment and growth, the margin may be somewhat illusory."

International Monetary Fund chart shows Moody's Analytics analysis of the distance between countries' debt limit and the debt-to-GDP ratio.

One tricky task is figuring out which countries have the luxury of treating their debt with benign neglect and which don't. As is the IMF custom these days, they've got a color-coded scheme. It shows which developed countries are so heavily indebted that they must cut their debt (pink), which have a lot of fiscal wiggle room (green) and which are in between (orange). The new working paper reproduces this chart (see above) that Moody's Analytics made based on the IMF economists' methodology.

Now, let's see how the deficit hawks respond.

Authors

]]>
http://www.brookings.edu/research/opinions/2015/04/08-federal-debt-worse-than-you-think-haskins?rssid=debt+debate{B7A64ECE-810E-46C8-94FC-079B0C112480}http://webfeeds.brookings.edu/~/88596868/0/brookingsrss/topics/debtdebate~The-federal-debt-is-worse-than-you-thinkThe federal debt is worse than you think

Of all the failures of recent Congresses and Presidents, none is more important than their failure to deal with the nation's long-term debt. Although Congress tied itself in knots trying to address the problem, the growth of debt remains, in the words of the Congressional Budget Office, "unsustainable."

Debt figures tell part of the story. When the Great Recession hit, the federal debt was equal to about 40 percent of GDP. But to fight the recession, Congress enacted an $800 billion dollar stimulus bill. Stimulus spending, combined with already enacted spending and tax policy, resulted in four years of trillion dollar deficits. As a result, the debt ballooned to 78 percent of GDP in 2013, almost twice the pre-recession level. The annual deficit is now declining at a stately pace, but by 2016 it will begin increasing again, and by 2020 under CBO's alternative fiscal scenario, we will once again return to annual deficits above a trillion dollars, thereby once again greatly increasing the national debt.

The accumulation of debt should prevent federal policymakers from feeling any sense of accomplishment. In fact, CBO estimates that the debt will be well over 100 percent of GDP by 2039 under conservative assumptions about spending and revenue. When CBO incorporates its estimates of the impact of the continuing large federal deficits on the nation's economy, it estimates that the accumulated debt held by the public will reach an astounding 180 percent of GDP by 2039. One wonders if members of Congress or the President read these CBO reports.

What's the word for our fiscal situation? Stunning? Shocking? Desperate? In recent testimony before the Senate Budget Committee, Boston University Economics Professor Laurence Kotlikoff, in effect, told the Committee that all of these terms are pathetically inadequate to describe our true fiscal situation. In compelling testimony, Kotlikoff argues that the federal fiscal situation is much worse than the CBO estimates let on. The reason is that CBO's debt estimates do not take into account the full financial obligations the government is committed to honor, especially for future payments of Social Security, Medicare, and interest on the debt. He asserts that the federal government should help the public understand the nation's true fiscal situation by using what economists call "the infinite-horizon fiscal gap," defined as the value of all projected future expenditures minus the value of all projected future receipts using a reasonable discount rate.

What difference does the fiscal gap approach make in our understanding of the true federal debt? CBO tells us that the national debt was a little less than $13 trillion in 2014. But the fiscal gap in that year as calculated by Kotlikoff was $210 trillion, more than 16 times larger than the debt estimated by CBO and already judged, by CBO and many others, to be unsustainable. If a $13 billion gap is unsustainable, what term should we apply to a $210 trillion gap? Kotlikoff also calculates that the fiscal gap is equal to about 58 percent of the combined value of all future revenue. Thus, we would need to reduce spending or increase taxes by enough to fill that 58 percent gap if we wanted to put the federal budget on a path to solvency that balances the interests of those now receiving benefits and those who hope to receive benefits in the future.

Kotlikoff goes on to illustrate that the fiscal gap is increasing at an alarming rate and that delay makes our problem much worse. In 2003, just a little more than a decade ago, the fiscal gap was $60 trillion. But by last year it had catapulted to $210 trillion. The fiscal gap may not continue increasing as rapidly as it has over the past decade, but with each passing year - as Congress and the President do their best to avoid action - our hole grows deeper by substantial amounts.

Under the CBO estimates used by Congress, we have a huge debt hole. Under the more comprehensive fiscal gap measurement, we have a chasm. But little if any Congressional action is planned to deal with the notorious level of debt. We're headed toward a fiscal black hole.

Authors

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Wed, 08 Apr 2015 11:52:00 -0400Ron Haskins
Of all the failures of recent Congresses and Presidents, none is more important than their failure to deal with the nation's long-term debt. Although Congress tied itself in knots trying to address the problem, the growth of debt remains, in the words of the Congressional Budget Office, "unsustainable."
Debt figures tell part of the story. When the Great Recession hit, the federal debt was equal to about 40 percent of GDP. But to fight the recession, Congress enacted an $800 billion dollar stimulus bill. Stimulus spending, combined with already enacted spending and tax policy, resulted in four years of trillion dollar deficits. As a result, the debt ballooned to 78 percent of GDP in 2013, almost twice the pre-recession level. The annual deficit is now declining at a stately pace, but by 2016 it will begin increasing again, and by 2020 under CBO's alternative fiscal scenario, we will once again return to annual deficits above a trillion dollars, thereby once again greatly increasing the national debt.
The accumulation of debt should prevent federal policymakers from feeling any sense of accomplishment. In fact, CBO estimates that the debt will be well over 100 percent of GDP by 2039 under conservative assumptions about spending and revenue. When CBO incorporates its estimates of the impact of the continuing large federal deficits on the nation's economy, it estimates that the accumulated debt held by the public will reach an astounding 180 percent of GDP by 2039. One wonders if members of Congress or the President read these CBO reports.
What's the word for our fiscal situation? Stunning? Shocking? Desperate? In recent testimony before the Senate Budget Committee, Boston University Economics Professor Laurence Kotlikoff, in effect, told the Committee that all of these terms are pathetically inadequate to describe our true fiscal situation. In compelling testimony, Kotlikoff argues that the federal fiscal situation is much worse than the CBO estimates let on. The reason is that CBO's debt estimates do not take into account the full financial obligations the government is committed to honor, especially for future payments of Social Security, Medicare, and interest on the debt. He asserts that the federal government should help the public understand the nation's true fiscal situation by using what economists call "the infinite-horizon fiscal gap," defined as the value of all projected future expenditures minus the value of all projected future receipts using a reasonable discount rate.
What difference does the fiscal gap approach make in our understanding of the true federal debt? CBO tells us that the national debt was a little less than $13 trillion in 2014. But the fiscal gap in that year as calculated by Kotlikoff was $210 trillion, more than 16 times larger than the debt estimated by CBO and already judged, by CBO and many others, to be unsustainable. If a $13 billion gap is unsustainable, what term should we apply to a $210 trillion gap? Kotlikoff also calculates that the fiscal gap is equal to about 58 percent of the combined value of all future revenue. Thus, we would need to reduce spending or increase taxes by enough to fill that 58 percent gap if we wanted to put the federal budget on a path to solvency that balances the interests of those now receiving benefits and those who hope to receive benefits in the future.
Kotlikoff goes on to illustrate that the fiscal gap is increasing at an alarming rate and that delay makes our problem much worse. In 2003, just a little more than a decade ago, the fiscal gap was $60 trillion. But by last year it had catapulted to $210 trillion. The fiscal gap may not continue increasing as rapidly as it has over the past decade, but with each passing year - as Congress and the President do their best to avoid action - our hole grows deeper by substantial amounts.
Under the CBO estimates used by Congress, we have a huge debt hole. Under the more ...
Of all the failures of recent Congresses and Presidents, none is more important than their failure to deal with the nation's long-term debt. Although Congress tied itself in knots trying to address the problem, the growth of debt remains, in the ...

Of all the failures of recent Congresses and Presidents, none is more important than their failure to deal with the nation's long-term debt. Although Congress tied itself in knots trying to address the problem, the growth of debt remains, in the words of the Congressional Budget Office, "unsustainable."

Debt figures tell part of the story. When the Great Recession hit, the federal debt was equal to about 40 percent of GDP. But to fight the recession, Congress enacted an $800 billion dollar stimulus bill. Stimulus spending, combined with already enacted spending and tax policy, resulted in four years of trillion dollar deficits. As a result, the debt ballooned to 78 percent of GDP in 2013, almost twice the pre-recession level. The annual deficit is now declining at a stately pace, but by 2016 it will begin increasing again, and by 2020 under CBO's alternative fiscal scenario, we will once again return to annual deficits above a trillion dollars, thereby once again greatly increasing the national debt.

The accumulation of debt should prevent federal policymakers from feeling any sense of accomplishment. In fact, CBO estimates that the debt will be well over 100 percent of GDP by 2039 under conservative assumptions about spending and revenue. When CBO incorporates its estimates of the impact of the continuing large federal deficits on the nation's economy, it estimates that the accumulated debt held by the public will reach an astounding 180 percent of GDP by 2039. One wonders if members of Congress or the President read these CBO reports.

What's the word for our fiscal situation? Stunning? Shocking? Desperate? In recent testimony before the Senate Budget Committee, Boston University Economics Professor Laurence Kotlikoff, in effect, told the Committee that all of these terms are pathetically inadequate to describe our true fiscal situation. In compelling testimony, Kotlikoff argues that the federal fiscal situation is much worse than the CBO estimates let on. The reason is that CBO's debt estimates do not take into account the full financial obligations the government is committed to honor, especially for future payments of Social Security, Medicare, and interest on the debt. He asserts that the federal government should help the public understand the nation's true fiscal situation by using what economists call "the infinite-horizon fiscal gap," defined as the value of all projected future expenditures minus the value of all projected future receipts using a reasonable discount rate.

What difference does the fiscal gap approach make in our understanding of the true federal debt? CBO tells us that the national debt was a little less than $13 trillion in 2014. But the fiscal gap in that year as calculated by Kotlikoff was $210 trillion, more than 16 times larger than the debt estimated by CBO and already judged, by CBO and many others, to be unsustainable. If a $13 billion gap is unsustainable, what term should we apply to a $210 trillion gap? Kotlikoff also calculates that the fiscal gap is equal to about 58 percent of the combined value of all future revenue. Thus, we would need to reduce spending or increase taxes by enough to fill that 58 percent gap if we wanted to put the federal budget on a path to solvency that balances the interests of those now receiving benefits and those who hope to receive benefits in the future.

Kotlikoff goes on to illustrate that the fiscal gap is increasing at an alarming rate and that delay makes our problem much worse. In 2003, just a little more than a decade ago, the fiscal gap was $60 trillion. But by last year it had catapulted to $210 trillion. The fiscal gap may not continue increasing as rapidly as it has over the past decade, but with each passing year - as Congress and the President do their best to avoid action - our hole grows deeper by substantial amounts.

Under the CBO estimates used by Congress, we have a huge debt hole. Under the more comprehensive fiscal gap measurement, we have a chasm. But little if any Congressional action is planned to deal with the notorious level of debt. We're headed toward a fiscal black hole.

Monday morning, March 16, 2015, America steps through a peculiar looking-glass: just yesterday, our Treasury could offer new public debt in order to make up for the shortfall in tax revenues relative to obligated spending, but today it cannot. After having taken a thirteen month holiday, courtesy of a February 2014 agreement to suspend it, the debt ceiling is back—set at exactly the levels of debt we have today, somewhere north of $18 trillion. With our heads against the ceiling, for the next few months (perhaps all the way into the fall) we will be funding government expenditures by the seat of our collective pants. That is manageable, and there is no reason to expect the debt ceiling’s return to bring any catastrophe—but neither is there any reason to think that the debt ceiling will do anything useful for our fiscal situation or even for our national discourse around the issue. Instead, the debt ceiling will most likely go back to being a terrible distraction from the important business of thinking about our nation’s fiscal future.

To understand the basic fruitlessness of making the debt ceiling the centerpiece of any fiscal negotiations, our political memories need to extend back farther than 2011. In that year, Republicans dug in their heels and won what they considered to be an important partial victory under the shadow of a debt ceiling-driven default. But that isn’t our only data point. Arguably, it was mixing the debt ceiling into the negotiations around the government shutdown in October 2013 that forced the Republicans to accept ignominious total defeat then. The same can be said about the previous instance in which the debt ceiling played a prominent role in a fiscal fight, in 1995-96. In that episode, Republicans thought they could force President Clinton to accede to their demands by attaching them to a debt ceiling increase, but Clinton had the fortitude to veto these and stare them down. His Treasury Secretary, Robert Rubin, devised a series of extraordinary measures, including messing around with the funding of the Social Security Trust fund (since explicitly banned by statute), and earned some furious impeachment threats in the process, but ultimately meant that the executive branch could outmaneuver and outlast the legislature in those negotiations. The lesson learned by Speaker Newt Gingrich was an extremely clear one: that the debt ceiling is a “dead loser” for Congress. Go farther back and you find more fruitless disruptions, if usually lower profile.

This shouldn’t come as a surprise. As I have previously argued, the debt ceiling acts like a roach motel for fiscal conservatives: they can come in to make big speeches, but they cannot leave until they have capitulated to as clean a raise as the President decides to demand. If those speeches are the whole point, and members of Congress just want the soapbox—well, that’s not disastrous, and indeed that’s the role that the debt ceiling has played for most of its history. But frankly we need action on our long-term fiscal problems rather than just words. Making hard choices in the budget process and hammering out sustainable bipartisan political compromise is where people should be directing their energy, notwithstanding a recent wave of snarky dismissals of grand bargaineering. Other than an extremely cheap rhetorical advantage, it’s hard to imagine what anyone hopes that arguing about the debt ceiling can reasonably be expected to yield.

As we think about the debt ceiling and the associated endgame, it’s also natural for us to get our arms around the very difficult question of what would happen if, for some awful reason, negotiations really did break down and the Treasury’s options were exhausted. That would be, very simply, a constitutional crisis. In a talk this past November, I tried to work out how the President could attempt to turn the situation into a “hiccup” rather than a massive blowup. I will be formally writing up my remarks in the future, but for now they are available for viewing here (starting around 46:00, though the whole event is well worth watching). Let us hope they never become terribly relevant.

Authors

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Fri, 13 Mar 2015 16:30:00 -0400Philip A. Wallach
Monday morning, March 16, 2015, America steps through a peculiar looking-glass: just yesterday, our Treasury could offer new public debt in order to make up for the shortfall in tax revenues relative to obligated spending, but today it cannot. After having taken a thirteen month holiday, courtesy of a February 2014 agreement to suspend it, the debt ceiling is back—set at exactly the levels of debt we have today, somewhere north of $18 trillion. With our heads against the ceiling, for the next few months (perhaps all the way into the fall) we will be funding government expenditures by the seat of our collective pants. That is manageable, and there is no reason to expect the debt ceiling's return to bring any catastrophe—but neither is there any reason to think that the debt ceiling will do anything useful for our fiscal situation or even for our national discourse around the issue. Instead, the debt ceiling will most likely go back to being a terrible distraction from the important business of thinking about our nation's fiscal future.
To understand the basic fruitlessness of making the debt ceiling the centerpiece of any fiscal negotiations, our political memories need to extend back farther than 2011. In that year, Republicans dug in their heels and won what they considered to be an important partial victory under the shadow of a debt ceiling-driven default. But that isn't our only data point. Arguably, it was mixing the debt ceiling into the negotiations around the government shutdown in October 2013 that forced the Republicans to accept ignominious total defeat then. The same can be said about the previous instance in which the debt ceiling played a prominent role in a fiscal fight, in 1995-96. In that episode, Republicans thought they could force President Clinton to accede to their demands by attaching them to a debt ceiling increase, but Clinton had the fortitude to veto these and stare them down. His Treasury Secretary, Robert Rubin, devised a series of extraordinary measures, including messing around with the funding of the Social Security Trust fund (since explicitly banned by statute), and earned some furious impeachment threats in the process, but ultimately meant that the executive branch could outmaneuver and outlast the legislature in those negotiations. The lesson learned by Speaker Newt Gingrich was an extremely clear one: that the debt ceiling is a “dead loser” for Congress. Go farther back and you find more fruitless disruptions, if usually lower profile.
This shouldn't come as a surprise. As I have previously argued, the debt ceiling acts like a roach motel for fiscal conservatives: they can come in to make big speeches, but they cannot leave until they have capitulated to as clean a raise as the President decides to demand. If those speeches are the whole point, and members of Congress just want the soapbox—well, that's not disastrous, and indeed that's the role that the debt ceiling has played for most of its history. But frankly we need action on our long-term fiscal problems rather than just words. Making hard choices in the budget process and hammering out sustainable bipartisan political compromise is where people should be directing their energy, notwithstanding a recent wave of snarky dismissals of grand bargaineering. Other than an extremely cheap rhetorical advantage, it's hard to imagine what anyone hopes that arguing about the debt ceiling can reasonably be expected to yield.
As we think about the debt ceiling and the associated endgame, it's also natural for us to get our arms around the very difficult question of what would happen if, for some awful reason, negotiations really did break down and the Treasury's options were exhausted. That would be, very simply, a constitutional crisis. In a talk this past November, I tried to work out how the President could attempt to turn the situation into a “hiccup” rather than a massive blowup. I ...
Monday morning, March 16, 2015, America steps through a peculiar looking-glass: just yesterday, our Treasury could offer new public debt in order to make up for the shortfall in tax revenues relative to obligated spending, but today it cannot.

Monday morning, March 16, 2015, America steps through a peculiar looking-glass: just yesterday, our Treasury could offer new public debt in order to make up for the shortfall in tax revenues relative to obligated spending, but today it cannot. After having taken a thirteen month holiday, courtesy of a February 2014 agreement to suspend it, the debt ceiling is back—set at exactly the levels of debt we have today, somewhere north of $18 trillion. With our heads against the ceiling, for the next few months (perhaps all the way into the fall) we will be funding government expenditures by the seat of our collective pants. That is manageable, and there is no reason to expect the debt ceiling’s return to bring any catastrophe—but neither is there any reason to think that the debt ceiling will do anything useful for our fiscal situation or even for our national discourse around the issue. Instead, the debt ceiling will most likely go back to being a terrible distraction from the important business of thinking about our nation’s fiscal future.

To understand the basic fruitlessness of making the debt ceiling the centerpiece of any fiscal negotiations, our political memories need to extend back farther than 2011. In that year, Republicans dug in their heels and won what they considered to be an important partial victory under the shadow of a debt ceiling-driven default. But that isn’t our only data point. Arguably, it was mixing the debt ceiling into the negotiations around the government shutdown in October 2013 that forced the Republicans to accept ignominious total defeat then. The same can be said about the previous instance in which the debt ceiling played a prominent role in a fiscal fight, in 1995-96. In that episode, Republicans thought they could force President Clinton to accede to their demands by attaching them to a debt ceiling increase, but Clinton had the fortitude to veto these and stare them down. His Treasury Secretary, Robert Rubin, devised a series of extraordinary measures, including messing around with the funding of the Social Security Trust fund (since explicitly banned by statute), and earned some furious impeachment threats in the process, but ultimately meant that the executive branch could outmaneuver and outlast the legislature in those negotiations. The lesson learned by Speaker Newt Gingrich was an extremely clear one: that the debt ceiling is a “dead loser” for Congress. Go farther back and you find more fruitless disruptions, if usually lower profile.

This shouldn’t come as a surprise. As I have previously argued, the debt ceiling acts like a roach motel for fiscal conservatives: they can come in to make big speeches, but they cannot leave until they have capitulated to as clean a raise as the President decides to demand. If those speeches are the whole point, and members of Congress just want the soapbox—well, that’s not disastrous, and indeed that’s the role that the debt ceiling has played for most of its history. But frankly we need action on our long-term fiscal problems rather than just words. Making hard choices in the budget process and hammering out sustainable bipartisan political compromise is where people should be directing their energy, notwithstanding a recent wave of snarky dismissals of grand bargaineering. Other than an extremely cheap rhetorical advantage, it’s hard to imagine what anyone hopes that arguing about the debt ceiling can reasonably be expected to yield.

As we think about the debt ceiling and the associated endgame, it’s also natural for us to get our arms around the very difficult question of what would happen if, for some awful reason, negotiations really did break down and the Treasury’s options were exhausted. That would be, very simply, a constitutional crisis. In a talk this past November, I tried to work out how the President could attempt to turn the situation into a “hiccup” rather than a massive blowup. I will be formally writing up my remarks in the future, but for now they are available for viewing here (starting around 46:00, though the whole event is well worth watching). Let us hope they never become terribly relevant.